Combining Variable Annuities with Other Annuities

During the past year, about 25 percent of workers aged 45 and older have decided to postpone their retirement to help increase their future financial security. One way to enhance your own financial future is by building a portfolio that may provide protection against loss of principal while taking advantage of the opportunity for potential stock market returns. Using a combination of variable and fixed annuities together may help you build such a portfolio.

Differing Functions of Variable and Fixed Annuities

With an immediate fixed annuity, in exchange for a lump-sum premium, an insurance company will pay an income for your lifetime or for a specified number of years. With a variable annuity, your principal can be invested in a variety of sub-accounts, which can include securities such as stocks and bonds whose value fluctuates with the market. The amount of any income from a variable annuity will depend on the overall investment performance of the sub-accounts you choose. Splitting a sum between an immediate fixed annuity and a deferred variable annuity can offer the opportunity to receive current income while continuing to pursue potential growth.

An Example of a Variable Annuity Combination

In this hypothetical example, half of a $500,000 sum was placed in an immediate fixed annuity with a guaranteed 5 percent annual interest rate. The remainder was placed in a variable annuity that has strong growth potential. The fixed annuity would provide a $24,000 annual pre-tax income for 15 years, which could be used to augment income from Social Security and other retirement plans. Remember, the guarantees of fixed annuity contracts are contingent on the claims-paying ability of the issuing insurance company.

By the time the fixed annuity is exhausted, the variable annuity account could potentially have grown to almost $600,000, assuming a hypothetical 6 percent average annual return. At this point, the account owner can consider purchasing another fixed annuity and possibly starting the process again. Remember, variable annuities generally contain mortality and expense charges, account fees, investment management fees, and administrative fees. Variable annuity sub-accounts fluctuate with changes in market conditions, and when surrendered, the principal may be worth more or less than the original amount invested. Variable annuities are long-term investment vehicles designed for retirement purposes. They are sold by prospectus only. Be sure to read the prospectus carefully before deciding whether to invest.

I contacted Immediate Annuities.com to buy one of my immediate annuities. They were prompt, very responsive, paid attention to detail, understood my objectives, and were superb when it came to staying on top of seeing the funds transfer and issue of new policy documents through to completion.

Dr. David Babbel Professor Wharton School

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Plan with the knowledge that most annuities have surrender charges that are assessed during the early years of the contract if the contract owner surrenders the annuity. In addition, if you surrender the contract before age 59½, you may be subject to a 10 percent federal income tax penalty. Annuity withdrawals are taxed as ordinary income.

Having enough money to last throughout retirement is a common concern. Earning a guaranteed income while pursuing growth is one way to help ensure that your retirement assets last as long as you will need them.