When planning for income in retirement, many individuals consider annuities as a potential part of their financial strategy. One type of annuity that often enters the conversation is the variable annuity. Like all financial tools, variable annuities in retirement planning come with advantages and disadvantages. Understanding both sides can help you determine if this option fits your broader retirement goals. 

This article takes a closer look at how variable annuities work, the potential benefits and limitations, and what role—if any—they might play in your retirement income strategy. 

What Is a Variable Annuity? 

A variable annuity is a contract with an insurance company that allows you to invest funds in a range of sub-accounts, which are similar to mutual funds. The annuity’s value, and eventually the income it produces, fluctuates based on the performance of these investments. 

Unlike fixed annuities, which offer predictable payments, variable annuities carry market risk. However, they also provide the potential for greater growth depending on how the investments perform. 

Variable annuities often include optional riders for income guarantees, death benefits, or long-term care benefits, typically for an additional cost. The complexity of these products means it’s important to fully understand what you’re purchasing and how it integrates into your financial picture. 

Potential Advantages of Variable Annuities 

There are several reasons someone might consider including a variable annuity in their retirement plan: 

1. Tax-Deferred Growth

Just like traditional IRAs or 401(k)s, variable annuities allow your investments to grow tax-deferred. You won’t owe taxes on any gains until you begin taking withdrawals. 

2. Income Options

Some variable annuities offer optional riders that allow for a stream of income during retirement. These riders can provide income even if the market value of the investments decreases, depending on the product terms. 

3. Investment Flexibility

You can often choose from a variety of sub-account investment options, allowing you to tailor your strategy based on risk tolerance and financial goals. 

4. Death Benefit Features

Variable annuities often come with a death benefit provision, which may allow heirs to receive a payout based on the original investment or account value, depending on the policy structure. 

Important Considerations and Drawbacks 

While variable annuities offer potential benefits, they also come with notable downsides. Here are some key factors to evaluate: 

1. Fees and Charges

One of the most common concerns is cost. Variable annuities can include mortality and expense charges, investment management fees, rider costs, and surrender charges. These fees can erode your investment returns over time. 

2. Market Risk

Because the investments inside a variable annuity are market-based, there’s a risk your account value will decrease during market downturns. While some riders may offer limited protection, that protection often comes at a cost. 

3. Complexity

Variable annuities are not easy to understand. Riders, fees, and payout rules can be complicated, making it difficult to compare options or fully evaluate their long-term impact. 

4. Limited Liquidity

Withdrawals before age 59½ may be subject to tax penalties. Additionally, many annuities impose surrender charges if you withdraw too much in the early years of the contract. 

How Variable Annuities Fit into a Retirement Strategy 

For some individuals, variable annuities in retirement planning may serve as a bridge between growth potential and structured income. They might be useful for those who: 

• Have already contributed the maximum to tax-advantaged retirement accounts 

• Are seeking another way to save with tax-deferred growth 

• Are comfortable with market risk and want access to income guarantees through riders 

Still, variable annuities should not be viewed in isolation. It’s important to assess how the annuity fits alongside your other income sources—such as Social Security, pensions, and investment withdrawals—as well as how it supports your broader goals like tax management, legacy planning, or healthcare coverage. 

Questions to Ask Before Choosing a Variable Annuity 

If you’re considering a variable annuity, here are a few questions that may help you evaluate the decision: 

• What are the total fees, and how do they compare to other investment options? 

• What income options or riders are available, and how do they work? 

• What are the surrender periods and penalties? 

• How does this annuity integrate into my overall retirement income plan? 

A financial planner can walk through these questions with you, helping evaluate whether the potential benefits justify the costs and risks based on your unique situation. 

Weighing the Pros and Cons of Variable Annuities in Retirement Planning 

Variable annuities are one of the more complex financial products available to retirees. While they offer tax-deferred growth and income features, they also involve fees and market exposure that may not suit everyone. For those exploring variable annuities in retirement planning, it’s important to weigh the pros and cons carefully. 

Milford Financial can help you assess whether a variable annuity aligns with your retirement goals, risk tolerance, and income needs. Schedule a call to learn how this type of annuity might (or might not) fit into your comprehensive plan. We look forward to speaking with you!