For individuals in their retirement period, annuities are a decent income stream that provides regular payments. Annuity or annuity contracts are agreements where one party pays another party a steady source of income. These contracts include details about the payments made to the beneficiary. The terms will also state whether it is a fixed or variable annuity.
What is a Variable Annuity?
Variable annuity represents a type of annuity contract that gets its value based on how the underlying investment portfolio performs. Usually, it includes sub-account portfolios. The receiver, based on the portfolio’s performance, may get variable income. If the underlying portfolio performs decently, the variable annuities increase, meaning the receiver will get higher returns. The opposite will apply when the portfolio performs adversely.
Variable annuity contracts are prevalent among two parties. The first party is the annuity provider, which is usually an insurance company. The other party is the receiver who enters into the contract with the provider. The receiver, through this contract, purchases the ability to receive a steady income stream in the future for a set amount of time.
What are Variable Annuities for retirement?
Variable annuities for retirement refers to contracts that retirees use to ensure a steady source of income in their retirement period. Due to the potential endless payments from these contracts, retirees can secure their future with considerable income. Unlike fixed annuities, retirees can’t expect a guaranteed source of income. However, they can receive higher than what fixed annuities offer if the underlying investment portfolio performs well.
Variable annuity for retirement is a decent option for individuals that have a high-risk tolerance. With variable annuities, these individuals don’t have to stick to fixed payments. Instead, they can generate higher returns. However, it also has the potential to backfire on them. Retirees may also get significantly lower income than fixed annuities if the underlying investment portfolio does not perform as expected.
How do Variable Annuities work?
Variable annuities allow individuals to select between several options for investing their funds in a portfolio. These options may include mutual funds, money market accounts, and other investments. These are known as sub-accounts. By choosing their underlying portfolio, individuals get more control over the process. Similarly, they can benefit significantly if their selected option performs well.
Variable annuities consist of two phases. These include the accumulation phase and the payout phase. During the accumulation phase, the variable annuity contract increases in value. It is the period when individuals make contributions to the variable contract. The payout phase is when they get to reap the benefits from the contract. During this period, they can get their payments in monthly or lump-sum amounts.
How do Variable Annuities differ from Fixed Annuities?
Fixed annuities, as mentioned above, offer individuals a fixed payout. However, this payout is usually lower compared to variable annuities. In contrast, variable annuities come with more uncertainty related to the amount that the receiver gets. However, with these annuities, they have the benefit of receiving higher returns. However, these can also result in significant losses if the underlying investments don’t perform well.
Conclusion
Variable annuities are contracts that allow individuals to get variable income at a steady rate in the future. The amount they receive depends on an underlying investment, which dictates the annuity’s value. Individuals can choose the underlying assets, known as sub-accounts. Variable annuities are different compared to fixed annuities, which offer lower but guaranteed payments.
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