Senior Finances 101: Understanding Annuities #4

Oct 12th, 2010 | By Sharon Shaw Elrod MSW EdD | Category: Senior Moments Blog

We hope this series on annuities helps you understand them better, and provides an option to consider as you review your investment strategy with your financial advisor.  Senior citizens need design their investment strategy carefully to insure adequate retirement income as much as it is possible to do that.

This article addresses variable annuities.  This kind of annuity developed as a result of insurance companies wanting to get in the act with mutual funds.  As with all annuities, the variable annuity is a contract with an insurance company.  Time periods are defined by the contract as well. 

What is different with variable annuities is the money you deposit is used to purchase mutual funds.  Some companies have a lot of mutual funds to choose from, and some only have a few.   Again the attractiveness of tax deferral is part of this strategy.  You only pay taxes on your gains when you withdraw funds from your annuity.  And you can buy and sell mutual funds within the annuity without paying any taxes on gains, if you do not withdraw any of the money. 

There is also a guarantee with variable annuities; you will never get back less money than your original deposit when you surrender the policy; if the current value is higher than the original deposit, then that is the amount that is returned.  

Again we turn to Suze Orman for advice about who might want to look at variable annuities:

  • Someone who has no beneficiary to whom to leave their money;
  • Someone who likes to buy and sell mutual funds often;
  • Someone who is in a very high tax bracket now but plans to be in a much lower tax bracket when they retire.

Be sure to talk with your trusted financial advisor about the advisability of mutual funds in your individual financial picture before you buy a variable annuity policy.



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