Best Variable Annuity:
How to Find the Best Variable Annuity
The single most important factor of a fixed annuity — the guaranteed rate — is absent in a variable annuity, which changes how you should comparison shop. The key to finding the best variable annuity is comparing contract details. The best plans feature a wider range of options and lower fees.
When looking for a good variable rate annuity, the prospectus is the place to start. It’s important to pick a plan that offers a broad range of investment options because, as with a stock market portfolio, diversification will be key.
You’ll want to spread funds out across at least 4 sub-accounts. Invest in market segments in line with your risk tolerance. A typical allocation might look like this: 20% money market, 40% U.S. bonds, 30% mutual funds, and 10% international equities. Carefully consider which market segments you’d like to invest in before committing to a variable rate annuity.
Factors to consider when shopping for a variable annuity include:
- Withdraw / Surrender charges
- The withdraw charge schedule
- Management fees
- Sub-account investment options
- Portfolio reallocation limits
- Lifetime dispersal option
Low-Fee Variable Annuities
The best variable annuities are flexible, meaning lower fees. Low withdraw fees, low management fees, zero front-end load, a compressed withdraw schedule, and high penalty-free allowances are all ideal.
Variable annuity withdraw charges range from 2-10% and phase out according to a withdraw schedule. The exact fee, along with the phase-out timeline are listed in the variable annuity prospectus. It's important to shop around and examine multiple prospectuses because these fees differ from carrier to carrier. Some are too strict or unfavourable. The best variable annuities have fees that zero out within 5 years. Avoid contracts that lower the fee to 1% or 2% but never eliminate it completely.
Variable annuities commonly feature a 1-2% annual management fee, similar to mutual funds. This fee covers the insurer's overhead and is not cause for concern in itself. The best variable annuities have lower management fees. Look for plans with a 1%, but not more than 2%, management fee.
All annuities feature a penalty-free withdraw allowance. This percentage determines how much you can withdraw annually and not incur a penalty fee. A good variable annuity will have an 8%+ withdraw allowance; 10% is very good.
Note that some annuity contracts apply the withdraw allowance to income only, which prevents withdrawing the initial premium penalty-free during the first few years. This is not a serious limitation, but in the first one or two years, your allowance window is effectively reduced if the annuity's growth rate is below the allowance percentage.
The Variable Annuity Prospectus
With a variable annuity, you have a hand in determining how to invest your money, similar to a 401(k). The initial premium will be divided into multiple sub-accounts targeting various asset class, from stocks to bonds to money market accounts. Each variable annuity offers its own set of investment options. Some might feature a fixed-rate money market sub-account, others might not. Some might feature an S&P 500 index, others might not.
Finding the best variable annuity requires that you first identify your investment goals and then compare prospectuses from multiple plans accordingly. Although each investor will have his or her own sub-account preferences, it's important to choose a variable annuity that offers sub-accounts ranging from high-growth to ultra-conservative. Wide-ranging plans are naturally more flexible because they allow you to realign market positions according your risk tolerance — which will change as you get older; they also facilitate diversification.
Don't Just Shop, Implement a Solid Retirement Strategy
Purchasing an annuity is a big decision. Online research is a good start, but prudent investors should discuss all their options and risks with an independent financial advisor. Request a free, no-obligation consultation today, along with a report of current rates on brand-name annuities.Speak with an advisor over the phone about annuities for FREE.
Variable Annuity Reallocation Limits
As a rule of thumb, the older you get, the more you should invest in conservative, low-risk assets like bonds and money market accounts. A variable annuity with broad sub-account options sets up the empty canvas, so to speak, but that's not the only factor. Consider how often you're allowed to shift funds from one sub-account to another — this is known as the reallocation limit. When skimming the prospectus it's easy to overlook this limit. Some plans will allow one reallocation per quarter while others allow one per month. The best variable annuities have generous reallocation limits.
The Lifetime Option
Variable annuities are typically deferred, meaning they accumulate earnings like a savings account or 401(k). This contrasts with a immediate annuity, which issues monthly checks. Deferring your annuity payments is recommended to maximize growth, so your earnings are re-invested and compounded tax-free. Eventually, however, you'll want to cash out.
The best variable annuities offer lifetime dispersal options, which allow you to lock in a guaranteed monthly paycheck for the remainder of your life. This is an excellent back-pocket option. Should you ever get concerned about making retirement ends-meat, the lifetime option will be your safety line.
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