A Paycheck in Perpetuity? The Truth About Variable Annuities With Guaranteed Income


Imagine the following scenario.

Someone offers you income for life. A paycheck in perpetuity. Even if the stock market crashes, you're still protected. Even better, you can profit during bull markets.

Who among us wouldn't get in line to sign up? Yet that's exactly the deal offered by a guaranteed income variable annuity. And it's a product you can buy today.

Variable annuities are popular. Especially with those already at retirement age. That understandable -- the security they offer is extremely tempting. As we age, we tend to become more conservative. Our earning power recedes. Setbacks are much harder to recover from. So the idea of locked-in income is a compelling one.

Does that sound too good to be true? There are some strings attached.

How does it work?

The mechanics of a variable annuity with income are simple. An insurance policy is combined with an investment portfolio. That policy guarantees your income. Market performance will not affect your payout.

Here's one example. Say you start with $100,000. That money is then invested. You have the option of starting withdrawals at once, or letting the money grow tax-deferred. You also receive guaranteed income. That amount is based on a percentage of your total investment. It also factors in variables such as your age.

That's an attractive proposition. Yet there are several catches. First, most of these annuities charge three-to-four percent. That's a serious fee. In a down year it could cripple your portfolio's return.

There's also this to consider. You're paying three or four-percent each year for the right to spend your own money. That's a fact that some people might have a hard time accepting. At face value, it certainly doesn't make good financial sense.

So why buy this annuity?

In a word: security. Annuities are best understood as insurance policies. Think of it as traveler's insurance. Most who buy traveler's insurance won't get anything for their money -- except peace of mind. Yet for a small minority that policy prevents a serious setback.

In essence, it's a tradeoff. Is the added security worth the financial penalty? For many of us, the answer is no. There's a reason why these annuities have become so popular with those older than 65, however. At some point, security becomes more valuable to us than lost opportunity.

Flexibility is another bonus. Unlike other annuities, these products offer you the ability to change your mind. While you'll have to pay a penalty to withdraw your money, this is an nice option for many.

There are other options to consider. Annuities are known for often being quite complex -- even needlessly so. Annuities are also often sold on commission. This setup often pits the buyer's interest against the seller's.

Despite these question marks, the popularity of such annuities is exploding, According to the Limre Retirement Institute, the money placed in variable annuities with income has doubled since 2009. Almost one trillion dollars is held in such annuities.

The takeaway

Annuities with guaranteed income have a few great benefits.These include locked-in payments and flexibility. It's essentially like receiving a paycheck after you retire. There are drawbacks to consider, however. These include costly fees. Complexity is another hurdle.

Are you worried about such complexity? Then there are other annuity options with much simpler terms. Some of them offer more generous payouts as well.

If you're looking for ironclad security and the ability to opt out, however, these products may be the right choice for you.

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