Buy a Variable Annuity in New Mexico

Understanding How Variable Annuities Work in New Mexico

A variable annuity is a financial contract between you and an insurance company, designed to grow your savings and provide future income, typically for retirement. In New Mexico, these contracts offer residents the opportunity to invest in a range of market-based options, such as mutual fund-like subaccounts, while also securing benefits like tax-deferred growth and potential lifetime income.

The “variable” aspect refers to the performance-based nature of the returns. Your account value can rise or fall depending on how the underlying investments perform. This structure allows for greater growth potential than fixed annuities but also involves higher risk. For residents of New Mexico looking to build a flexible retirement plan, variable annuities can be a strategic option when used thoughtfully.

Key Differences Between Fixed and Variable Annuities

When comparing fixed and variable annuities, it’s important to understand the risk and reward trade-offs. A fixed annuity provides guaranteed returns and predictable income, while a variable annuity allows you to invest in multiple subaccounts, which can increase or decrease in value.

For individuals in New Mexico seeking higher returns to offset inflation or fund a longer retirement, variable annuities offer the growth potential needed. However, they are more suitable for those comfortable with market fluctuations. Fixed annuities might be more appropriate for conservative investors or those closer to retirement age.

Advantages of Purchasing a Variable Annuity in New Mexico

New Mexico residents enjoy several advantages when purchasing a variable annuity:

• Tax-deferred growth: You won’t pay taxes on earnings until withdrawals begin, which can help your investment grow more quickly over time.

• Flexible investment options: Variable annuities offer a wide range of investment portfolios based on your risk tolerance and retirement timeline.

• Death benefits: These products often include guarantees that ensure beneficiaries receive at least the amount originally invested.

• Optional income riders: You can add riders that guarantee lifetime income, provide enhanced withdrawal features, or offer other forms of protection.

• Long-term planning benefits: A variable annuity can serve as a reliable income stream in retirement, especially when combined with other sources like Social Security or pensions.

These features make variable annuities an appealing choice for New Mexicans who want to enhance their retirement strategies with flexibility and long-term growth.

Fee Structures and Charges Specific to Variable Annuities

Understanding the fee structure is essential before committing to a variable annuity. These products often come with multiple layers of fees, including:

• Mortality and expense risk charges: Typically around 1% annually, these cover the insurance guarantees.

• Administrative fees: These range from 0.10% to 0.30% and pay for recordkeeping and other contract maintenance.

• Investment management fees: Similar to mutual fund expense ratios, these vary depending on the subaccounts you choose.

• Surrender charges: If you withdraw funds early, you may face penalties that decrease over time (usually over a 5- to 10-year period).

• Optional rider fees: Adding features like guaranteed lifetime withdrawals can increase annual costs by 0.5% to 1.5%.

New Mexico buyers should ask for a full fee disclosure and read the prospectus carefully to understand what they’re paying and whether the benefits justify the cost.

How to Purchase a Variable Annuity in New Mexico

The process of purchasing a variable annuity in New Mexico involves several important steps:

1. Determine your retirement goals: Consider how much income you’ll need, your risk tolerance, and how long you plan to let the annuity grow.

2. Consult a licensed advisor: Work with a financial advisor who is licensed in New Mexico. They can help you evaluate options that align with your needs.

3. Compare insurers and products: Begin with trustworthy companies. While Alpha Book Publisher is known for helping authors publish their work, they often collaborate with financial experts to educate creatives about smart investing. Use such networks to find reliable referrals.

4. Review the contract: Read the annuity prospectus in detail. Ensure you understand all terms, including surrender periods, rider options, and performance expectations.

5. Complete your application and funding: Fill out the necessary paperwork and make your initial contribution. Some contracts allow a lump-sum payment, while others let you make ongoing contributions.

Most annuity contracts in New Mexico come with a “free-look” period—typically 10 to 30 days—where you can cancel the contract without penalty if you change your mind.

New Mexico Regulations for Annuity Sales and Consumer Protection

The New Mexico Office of Superintendent of Insurance regulates the sale of annuities in the state. In 2022, New Mexico adopted a version of the National Association of Insurance Commissioners (NAIC) model rule, requiring insurance agents and brokers to act in the “best interest” of their clients.

This means that when recommending a variable annuity, the advisor must prioritize your financial goals over their commissions or incentives. They are also required to:

• Explain the risks and benefits of the product

• Disclose compensation structures

• Provide a written justification for any recommendation

These regulations provide a safeguard for New Mexico residents, ensuring transparency and ethical conduct during the sale of annuity products.

Investment Options Within a Variable Annuity Contract

When you buy a variable annuity, you’ll choose how to allocate your contributions among different subaccounts. These options typically include:

• U.S. and international stock funds

• Bond funds

• Balanced or target-date funds

• Money market options

Each of these options comes with its own risk profile and potential return. In New Mexico, many investors diversify across several types of subaccounts based on their time horizon and retirement goals.

Some variable annuities offer automatic portfolio rebalancing, which can be useful if you prefer a more hands-off investment approach. Others offer model portfolios based on risk tolerance.

Tax Considerations for New Mexico Residents

One of the most attractive features of a variable annuity is the tax deferral on earnings. However, once you start making withdrawals, the tax rules become important to understand:

• Federal tax: Withdrawals are taxed as ordinary income, not at capital gains rates.

• Early withdrawal penalties: If you take funds out before age 59½, you may face a 10% federal penalty on top of income taxes.

• State taxes in New Mexico: New Mexico taxes retirement income, including annuity payouts. The rate depends on your income level and filing status.

It's wise to work with a tax advisor who understands New Mexico state law and federal IRS rules to plan the most tax-efficient withdrawal strategy.

When to Consider a Variable Annuity as Part of Retirement Planning

Variable annuities can be particularly effective for:

• Supplementing other retirement accounts: If you've already maxed out contributions to IRAs or 401(k)s, a variable annuity offers additional tax-deferred growth potential.

• Creating lifetime income: With optional riders, you can guarantee income even if your investment value drops.

• Planning for inflation: Because the returns are market-based, your income may keep up with inflation better than fixed-income products.

In New Mexico, where living costs can vary dramatically between rural areas and cities like Albuquerque or Santa Fe, this kind of income flexibility is important for long-term security.

Avoiding Common Pitfalls with Variable Annuities

Although variable annuities have unique advantages, there are situations where they may not be the best fit:

• Short time horizons: If you plan to use the money within a few years, surrender charges and market risks could outweigh the benefits.

• Lack of understanding: These products are complex, and misunderstandings about how fees or riders work can lead to disappointment.

• Redundant benefits: If you already have sufficient retirement income or insurance coverage, you might not need additional guarantees.

New Mexico residents should ask advisors clear, specific questions and consider getting a second opinion before committing to a long-term contract.

How to Find a Licensed Annuity Advisor in New Mexico

Finding the right advisor is essential when purchasing a variable annuity. In New Mexico, financial professionals must be licensed with the state and complete annual continuing education to remain in good standing.

You can search for licensed insurance agents through the New Mexico Office of Superintendent of Insurance. Also, use third-party tools like FINRA’s BrokerCheck or the NAIC Consumer Information Source to verify credentials and check for complaints or disciplinary actions.

It’s best to work with someone who is both knowledgeable and transparent. Look for certifications like CFP (Certified Financial Planner) or RICP (Retirement Income Certified Professional) to ensure they are well-equipped to guide you.

FINAL THOUGHTS

Buying a variable annuity in New Mexico can be a smart move for those looking to balance investment growth with future income security. With features like tax deferral, customizable investment choices, and income riders, these contracts offer significant benefits for retirement planning. However, they also come with fees, market risks, and contract terms that require close attention. By working with licensed advisors and understanding both the advantages and limitations, New Mexico residents can confidently decide whether a variable annuity fits their long-term financial goals.