INSTEAD OF ADDING a living benefits rider, you can squeeze income out of a tax-deferred variable annuity by converting it to an immediate variable annuity. But there’s a crucial difference between the two. A variable annuity with living benefits leaves you as owner of the account’s assets and there may be money left over for your heirs. With an immediate variable annuity, you surrender ownership to the insurance company.
Indeed, immediate variable annuities are an odd beast: As with an immediate fixed annuity, you hand over a lump sum to an insurance company in return for lifetime income. But unlike with an immediate fixed annuity, you still get to call the shots on how the immediate variable annuity is invested. As with other variable annuities, there’s a menu of investment options you can choose from.
Your goal: Pick investments that beat a hurdle rate of return, known as the “assumed interest rate,” which might be 3% or 4% a year. The higher the AIR and the older you are when you buy the annuity, the more income you initially receive. But a high AIR has a drawback: For your income to grow, the investments you select within the variable annuity need to generate annual returns that outpace this hurdle rate. What if you fall short? Your monthly income will decline.
You also need to pay close attention to a variable annuity’s costs. The higher those costs, the harder it will be for your investments to earn decent performance and thereby outpace the hurdle rate of return. Still, an immediate variable annuity should give you more initial income than a tax-deferred variable annuity with a living benefits rider—and, if the markets are kind, you could see your income rise over time.
Next: Payout Funds
Previous: Living Benefits