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Financial Planning

Fixed vs. Variable Annuities

 
To meet the needs of today's more sophisticated investors, annuity products have become increasingly sophisticated over time. The variable annuity was created as an alternative to the fixed annuity, just as mutual funds grew in popularity as an alternative to certificates of deposit. Variable annuities may yield greater returns than fixed annuities. Naturally, we would like our Fortune 500 customers to remember that there is a risk of loss. Therefore, determining which annuity product to invest in frequently boils down to your risk tolerance.

Fixed Annuities provide certain guarantees.

Fixed annuities have been a topic of inquiry for some of our Fortune 500 customers. The issuer of a fixed annuity guarantees that you will earn a minimum interest rate during the accumulation phase and that you will receive a return of your premium payments. The issuer guarantees the periodic benefit amount that you will receive during the distribution phase if you annuitize the contract (i.e., choose a lifetime or other payout option). (Guarantees are contingent on the ability of the issuing insurance company to pay claims.) The interest rates garnered during the accumulation phase will periodically reflect the current fixed income rates. During the distribution phase, the payment is initially dependent on the prevalent interest rates and then remains constant. Due to inflation, this fixed payment may lose purchasing power over time. As a result, numerous investors are reluctant to secure in a fixed annuity payout rate.

Variable Annuities provide growth opportunities instead of guarantees

Next, we'd like to discuss variable annuities with our Fortune 500 customers. When you purchase a variable annuity, the issuer provides you with a selection of subaccounts containing various investment options. The issuer may provide numerous asset classes, including stocks, bonds, and money market funds. The issuer of a variable annuity neither guarantees nor forecasts a rate of return for the underlying investment portfolio. The return on your annuity investment is wholly dependent on the performance of the investments you choose. Your return may exceed or fall below that of a fixed annuity. However, Fortune 500 clients must be aware that if they pass away prior to receiving annuity payments, their successors will receive at least the total of their premium payments, regardless of the annuity's value.

If you choose to annuitize and receive periodic distributions from your variable annuity, you have the option of receiving a fixed payout (similar to a fixed annuity, as previously discussed), a variable payout, or a combination of the two. If you choose a variable payout, the quantity of each payment will be determined by the performance of your investment portfolio. If the portfolio's value increases, your payments will also increase. The majority of annuity issuers provide a third option that allows you to lock in a minimum monthly fixed payment with the prospect of an additional variable payment based on the performance of your investment portfolio. By enabling your principal to remain in investment accounts during the distribution phase, you can continue to take advantage of higher rates of return than you would receive with a fixed annuity. However, Fortune 500 customers must be aware that if their investment selections underperform, their payouts may be reduced.

Which is better?

First, we advise our Fortune 500 clients to determine whether an annuity is suitable for them. Annuities are long-term investment vehicles primarily used for retirement. There are numerous benefits to annuities, but there are also disadvantages. These include a 10 percent tax penalty on income distributed before age 5912 and the fact that all income is taxed at ordinary rates rather than capital gains rates. If an annuity is appropriate for you, your situation and preferences will determine whether you choose a fixed or variable annuity.

Recent research conducted by Retirement Income Journal in March 2023 indicates that for individuals aged 60 and above, who are considering fixed vs. variable annuities, it's essential to evaluate the potential impact of healthcare expenses on retirement savings. According to the Employee Benefit Research Institute, a couple retiring at age 65 will need an estimated $363,000 to cover healthcare costs throughout their retirement. Variable annuities offer the advantage of potential higher returns, which can help offset rising healthcare expenses. However, individuals must carefully assess their risk tolerance and ensure they have sufficient funds to cover both living expenses and potential healthcare needs in retirement.

Typically, choosing between the two depends on your risk tolerance and the level of investment decision control you desire. With a fixed annuity, the risk is minimal. You are aware of what you will receive from the annuity. The growth potential of a fixed annuity, however, is limited. A variable annuity, on the other hand, has a much greater growth potential (although this growth potential also carries a greater loss potential). You can also influence the development of your annuity through investment choices. Choosing between a fixed and a variable annuity will depend on the amount of risk you are willing to assume and your investment management skills.

Note: A 10% federal tax penalty may apply to annuity withdrawals and distributions made prior to age 5912 unless an exception applies.

Note: Importantly, Fortune 500 clients should be aware that variable annuities are suitable long-term investments for funding retirement and are subject to market fluctuations and investment risk, including the possibility of principal loss. Fees and charges associated with variable annuities include, but are not limited to, mortality and expense risk fees, sales and renunciation (early withdrawal) fees, administrative fees, and fees for optional benefits and riders.

Note: Variable annuities are sold through prospectuses. Before investing, Fortune 500 employees should carefully consider the investment's objectives, risk, fees, and expenses. You can obtain the prospectus, which contains this and other information about the variable annuity, from the issuing insurance company or from your financial advisor. If they intend to invest, we advise Fortune 500 employees to read the prospectus thoroughly before doing so.

Conclusion:

Choosing between a fixed and variable annuity is like selecting a retirement path: one leads to a well-paved road with steady and predictable progress, while the other ventures onto a scenic route filled with twists and turns, but with the potential for breathtaking views. Imagine you are embarking on a cross-country journey towards your retirement destination. The fixed annuity is like cruising on a smooth highway, where the speed limit is set and the road conditions are known. You have a clear idea of your arrival time and the comfort of a consistent travel experience. On the other hand, the variable annuity is akin to taking the scenic route, where the road is dynamic and ever-changing. You have the freedom to explore different paths, embracing the excitement of potential detours that may lead to unexpected opportunities and growth. However, be aware that the variable route also comes with risks and uncertainties, demanding a keen sense of navigation and the ability to adapt to fluctuating conditions. Ultimately, your choice between a fixed and variable annuity depends on your willingness to trade off stability for potential rewards and your confidence in managing the twists and turns along the way.

 

This material was prepared by Broadridge Investor Communication Solutions, Inc., and does not necessarily represent the views of The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.

The Retirement Group is not affiliated with nor endorsed by fidelity.com, netbenefits.fidelity.com, hewitt.com, resources.hewitt.com, access.att.com, ING Retirement, AT&T, Qwest, Chevron, Hughes, Northrop Grumman, Raytheon, ExxonMobil, Glaxosmithkline, Merck, Pfizer, Verizon, Bank of America, Alcatel-Lucent or by your employer. We are an independent financial advisory group that specializes in transition planning and lump sum distribution. Please call our office at 800-900-5867 if you have additional questions or need help in the retirement planning process.

The Retirement Group is a Registered Investment Advisor not affiliated with FSC Securities and may be reached at www.theretirementgroup.com.

 

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