Whether you've simply got extra money to invest or receive an unexpected lump sum, a variable annuity can be an attractive investment vehicle. Keep in mind, though, that not all annuities are equal, and it's important to find a variable annuity product that's right for your circumstances.
What Is a Variable Annuity?
A variable annuity is a popular investment vehicle for long-term or lump sum investments. When you buy an annuity, you pay the issuer in return for guaranteed payments at a specific interval. You might begin receiving monthly payments immediately upon purchasing an annuity, or you might wait years before you begin receiving benefits from your annuity. Different types of annuities have different risks and tax benefits and liabilities.
A Variety of Investment Options
The biggest benefit of a variable annuity is the ability to shift your investments around within the annuity. You can designate how you would like to invest your funds; for example, you could put half of your investment toward stocks, and the rest toward bonds.
Many variable annuities allow you to shift your investments around at any point prior to the payout period. You may begin by investing all of your annuity funds in a stock position, but decide a year or two down the line to shift to a more balanced portfolio. Look for a variable annuity that allows you to transfer investment options within an annuity without paying fees or taxes.
Not Guaranteed Income
Many people use an annuity to supplement other retirement income. Unfortunately, some people don't realize that an annuity is just like any other investment; it can grow, but it can also shrink rapidly if the underlying investment loses value. While you purchase an annuity to receive periodic payments for a specific length of time, you may run out of money before that time is up, or you could receive low periodic payments because of investment losses.
Look for an annuity provider that is in excellent financial health. You don't want to lose your annuity funds by investing in a provider that goes under in a time of financial adversity. If you're concerned about your investment funds, consider purchasing the option of guaranteed minimum payments. If you do purchase this option, look carefully at all the price implications both up front and throughout the life of the annuity.
Read About the Fees
Variable annuity providers are in business to make money. They charge a variety of fees and potential penalties when you purchase an annuity, so make sure you understand all of the fees before you make a purchase. Some annuities charge fees for early withdrawal, and all annuities have a variety of administrative fees. Beware of annuity options or bonuses. Annuity administrators often make up the money on these options and bonuses by charging you other fees elsewhere, so examine annuity information thoroughly before buying.
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