Variable Annuities
Variable annuities offer buyers a range of investment choices.
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Variable annuities
provide many of the benefits of
fixed annuities
including tax-deferred earnings and a choice of payouts, plus the opportunity to make a
potentially unlimited contribution if the annuity isn't part of an employer's retirement plan,
tax-sheltered 403b plan, or an IRA. In addition, variable annuities offer the potential for greater
returns and the opportunity to make
your own decisions about how to allocate your
assets among investment categories.
With variable annuities, lots of things can vary, or change: how your contributions are invested,
the rate of return
that you earn on the separate account funds that you select, and the amount of income you
receive if you annuitize.
What remains constant with all annuities, fixed or variable, is the opportunity to select
guaranteed lifetime income.
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CREATING A PORTFOLIO
You allocate your money among the underlying funds available through the separate
account of your variable annuity, also called investment portfolios. These funds are like
mutual funds and are either
designed specifically for the annuity company or are versions of retail funds designated for exclusive
annuity use. But while the names of
the investment portfolios may be the same or similar to those of retail mutual funds, they are not
the same funds.
Your job is to choose among the underlying funds available through the separate
account of your variable annuity, much as you would with
a 401(k) or
403(b) retirement plan or individual
retirement annuity. Typically there will be a dozen or more funds, usually including
stock funds, bond funds, a money market
fund, a fixed interest account and the separate account funds that are offered. Sometimes, you have
an even wider choice drawn from a number of different investment management companies.
MAKING THE INVESTMENT
You can allocate your money however you like, usually on a percentage basis.
For example, you might put 50% in a growth stock fund, 25% in a balanced fund, and 25% in a
money market fund - or some other combination.
Each time you add money, you buy a specific number of
accumulation units, or shares,
based on the unit value of the separate account fund you're putting money into. The accumulation
unit value is the total value of the separate account fund divided by the number of existing
accumulation units.
A BRIEF HISTORY
Variable annuities were introduced in 1952. Their history, like that of mutual
funds and self-directed pension and profit-sharing plans, is directly related to the increasing
responsibility individuals have for making their retirement financially secure.
PUTTING MONEY
TO WORK
When you add money to your variable annuity either in a lump sum or as
incremental purchases during an accumulation period, you must decide how your assets are going
to be allocated among the separate account funds you have chosen.
With many variable annuities, you can allocate a specific percentage of your contributions to
each of your separate account funds at the time you buy. For example, if you invest $40,000 and
have selected four funds, you might buy $10,000 worth of accumulation units in each of the funds.
Or, if you invest $400 a month, you would allocate $100 into each of the funds.
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MAKING ADJUSTMENTSVariable annuities let
you create asset mixes that you're comfortable with, either at different stages in your life or
in different economic climates. This flexibility lets you share in the benefits of a strong stock
market, for example, or move money into more stable funds if you're concerned about preserving
your gains as you get closer to retirement.
No one mix suits every investor, though many investors emphasize stock funds, since they have
historically provided the strongest returns over the long term, and thus the greatest opportunity
for growth, despite their volatility.
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© 2010 by Lightbulb Press, Inc.
All Rights Reserved.
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