Northwestern Mutual

5 Tips for Choosing the Right Variable Annuity

Americans are wondering whether they'll have enough money to live comfortably in retirement. Fortunately, many are taking steps to improve their situation, including saving more money and changing the way they invest.1 Here's five tips on an investment that makes it easy to create a reliable stream of income.

One investment tool that can help put their retirement savings back on track is the variable annuity. That's because variable annuities offer a unique combination of insurance and investment features, including the ability to accumulate assets on a tax-deferred basis, the potential for long-term growth, and a choice of payout options that can help provide a steady stream for years, or even for life. Of course, not all variable annuities are alike. That's why you'll want to carefully review all your options before purchasing an annuity to make sure you get the type of contract that best suits your particular needs.

What specifically should you look for? Start by considering the following:

  1. 1. Financial Strength Ratings-A variable annuity is only as good as the insurance company that issues it. That's because the guarantees in an annuity are supported by the capital and reserves the insurance company sets aside to cover these obligations. As a result, the claims-paying ability of the insurance company should be a key factor in your purchase decision. Look for a company with the highest financial strength ratings from each of the four major rating agencies: A.M. Best Company, Fitch Ratings, Moody's Investors Service and Standard & Poor's. Keep in mind that ratings have no impact on investment return or principal value of the variable investments.
  2. 2. Investment Options-One of the biggest benefits of a variable annuity is the ability to direct your contributions to a number of professionally managed stock, bond and money market subaccounts. Many also offer a guaranteed interest rate fund option, which provides a competitive rate of return and a guarantee that the interest rate your money earns won't fall below a certain level.
    Most variable annuities also allow you to shift your investments at any point prior to the payout period, giving you the ability to adjust your investment strategy as your needs and circumstances change over time. As you compare variable annuities, look for one that offers a variety of subaccounts that is appropriate for your retirement goals. Make sure your variable annuity also allows you to transfer among those investment options without incurring fees.
  3. 3. Fees-As with any investment vehicle there are certain charges associated with a variable annuity. Some of these include the mortality and expense risk charge (M&E which covers the costs of distribution, administration and insurance risks), a management fee for managing the underlying investment portfolios, and possibly a sales charge. But be aware: not all variable annuities charge the same fees. That's why it's crucial to make an apple-to-apple comparison of each contract's features and their costs.
  4. 4. Withdrawal Charges-Variable annuities are designed to be long-term retirement investments. However, there may be times when you want or need to access the money in your contract. Be sure you understand what's involved if you want to take money from your annuity: many variable annuity providers impose a charge for withdrawals taken before a certain point, and any applicable taxes will also apply.
  5. 5. Qualified Retirement Plans-Investing in a variable annuity through an IRA or 401(k) plan provides no additional tax advantages — these plans already provide tax-deferral. However, variable annuities offer certain guarantees not available from other investments that may make them worth placing in a qualified retirement account. You'll want to carefully evaluate these benefits and their costs before investing. 

Variable annuities offer unique advantages that make them an important source of retirement income for a growing number of Americans. A little homework upfront can help ensure that the variable annuity you select is the right one to help you create the kind of retirement you want in the future.

The Northwestern Mutual Life Insurance Company (Northwestern Mutual)