Waddell & Reed


As baby boomers approach retirement, and with many already in retirement, they face a struggle to build nest eggs that are capable of lasting 20 or 30 years. A recent study by the Employee Benefit Research Institute indicated that, the percentage of workers planning to work after they retire has increased to 72 percent in 2009 (up from 66 percent in 2007).* Consequently, more investors are considering annuities as a source of a guaranteed stream of income later in life.

What is an Annuity?

An annuity is a contract between you and an insurance company to provide you future income, usually during retirement. When you buy a variable annuity, your money is invested in underlying funds.

Here are five key benefits of an annuity:

  • Sheltered Earnings
    Because you can shelter your investment earnings from current taxes, you increase their potential for growth.
  • Deferred Taxes
    Tax deferral is one of the main benefits of an annuity. You pay no federal taxes on dividends, capital gains or interest while they accumulate in your account. Taxes don’t become due until you begin receiving payments – typically during your retirement years when you may be in a lower tax bracket.
  • Dramatic Long-term Effects
    The benefits of tax-deferred compounding over taxable investments can be dramatic. Because an annuity is tax-deferred and has the power of compounding, it can be an effective way to invest for long-term goals.
  • Funding Via Lump Sum or Several Contributions
    You may fund your annuity by paying premiums in a lump sum or as a series of contributions over time, depending on the type of annuity you choose.
  • No Contribution Limits
    Unlike an IRA, annuities have no contribution limits.

Should I choose a fixed or variable annuity?

Here’s what you should know when choosing between fixed and variable annuities:

  • With a fixed annuity, you’re guaranteed (Subject to the claims-paying ability of the issuing insurance company) a specific rate of interest for a predetermined amount of time, ensuring the safety of your principal and providing security against market fluctuations.
  • With a variable annuity, you have the potential for greater returns, yet you take on a higher level of risk. You can invest your money within a select group of managed portfolios investing in various types of assets within the annuity. Your return depends on the performance of the portfolios you choose.

What are the withdrawal options?

When it's time to withdraw from your annuity, you generally have two choices:

  1. Receive your payments in a lump sum or over a fixed number of years
  2. You can structure the annuity contract to guarantee monthly payments for life.

Is there a death benefit guarantee?

An annuity typically offers a death benefit guarantee. If death occurs before periodic withdrawals begin, your beneficiary will receive all payments or the total market value of the account, whichever is greater (less any prior withdrawals, called partial surrenders). This guarantee is subject to the claims-paying ability of the issuing insurance company.

What are the downsides?

  • There are charges and expenses associated with annuities and variable life insurance products, including mortality and expense risk charges, management fees, fund expenses, distribution fees, administrative fees, expenses for optional riders and deferred sales charges for early withdrawals.
  • Annuities are considered to be long-term investments for purposes such as retirement planning. Most contracts have contingent deferred sales charges (CDSC), also called surrender charges. Generally, that means if you withdraw funds during the first five to 10 contract years, there may be a fee (see your specific contract).
  • The IRS imposes a 10 percent federal tax penalty if you withdraw funds before age 59 ½ , except in certain hardship cases. Such penalties are in addition to paying regular taxes owed.

Are annuities right for you?

Whether an annuity is right for you depends on your risk concerns, liquidity needs, tax situation and other personal considerations. The tax information in this section of the website is for informational purposes only. It is not intended, and should not be construed, as a recommendation, or legal, tax, or investment advice. You should consult your tax advisor to answer questions about your specific situation or needs. NOTE: We encourage all investors to work with a financial advisor to develop an individual, comprehensive financial plan.

Investors should consider the investment objectives, risks, charges and expenses of a variable life insurance contract, along with the underlying investments, carefully before investing. A prospectus containing this and other information for any variable insurance products or any underlying investments can be obtained from the insurance company or a financial advisor.

Waddell & Reed offers insurance products through arrangements with outside insurance companies.

Please remember that an investment in an underlying fund involves risk. Investment return and principal value will fluctuate, and it is possible to lose money by investing.

* 2009 Retirement Confidence Survey, Employee Benefit Research Institute. www.ebri.org

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