Retirement & Financial Planning Report

Variable annuities increasingly offer guaranteed minimum income benefits. Such benefits provide variable annuity investors a guaranteed return if they:

* Pay for added protection,


* Retain the annuity for an extended time period, and

* Annuitize the contract with the issuing company.

Generally, the cost for such a guarantee is around 0.5 percent per year and the holding period is at least seven years. A guaranteed income benefit might grow at 7 percent for 10 years, or until age 80. Thus, someone who invests $100,000 in a variable annuity with this feature before age 70 would see the guaranteed principal grow to nearly $200,000 after a 10-year hold.

This guarantee would be in place whether the original $100,000 investment grows to $250,000 (in which case the guarantee would not be meaningful) or falls below $100,000 in a prolonged bear market. In this example, you could convert your $200,000 guaranteed principal to a lifetime stream of income even if your actual account balance is only $75,000 or $50,000.

Few variable annuities actually are annuitized–they seldom are converted to a lifelong stream of cash flow. Instead, owners of variable annuities who want retirement income usually take withdrawals.

Say John Smith has $200,000 in a variable annuity. If John withdraws $10,000 he’ll still have $190,000 in the account. That $190,000 might get back to $200,000 or higher, if the investment accounts in the variable annuity perform well.

* Benefits of withdrawals: Taking money from a variable annuity this way gives investors more flexibility, compared with annuitization. You can take out more or less each year. In addition, using withdrawals generally provides a death benefit to a beneficiary.


* Drawbacks of withdrawals: There may be a surrender charge for withdrawals that exceed certain limits. If a variable annuity comes with guaranteed income, large withdrawals may reduce guaranteed benefits. Moreover, withdrawals often are fully taxable, from a taxable account, while annuitization generates cash flow that is partially tax-sheltered as a return of principal.