As pensions have become all but extinct, the allure of annuities has grown ever stronger. These tax-deferred investments sold by insurance companies allow you to grow your nest egg and then, when you’re ready to retire, trigger an income that you can’t outlive.
While annuities can be an important part of your retirement savings strategy, there are many things to consider, including what kind, when, and how much.
An annuity is a contract between you and an insurance company that requires the insurer to make payments to you, either immediately or in the future. You buy an annuity by making either a single payment or a series of payments. Similarly, your payout may come either as one lump-sum payment or as a series of payments over time.
An annuity can provide income you can't outlive. Your investment choices can be indexed, meaning they participate in market gains, or fixed, meaning you get a guaranteed return.
Consider an annuity through an employer plan or IRA or consider a personal annuity.
Put money in, either all at once, or contribute regularly.
Watch how your account performs over time.
Retire and choose one of many income options, including income for life.
We can offer options to complement your other investments. An annuity is the only financial offering that can guarantee income for life no matter how long you live.
People typically buy annuities to help manage their income in retirement. Annuities provide three things:
Periodic payments for a specific amount of time. This may be for the rest of your life, or the life of your spouse or another person.
Death benefits. If you die before you start receiving payments, the person you name as your beneficiary receives a specific payment.
Tax-deferred growth. You pay no taxes on the income and investment gains from your annuity until you withdraw the money.
Immediate annuities are purchased with a lump sum, whereby the income payments to you begin "immediately" (generally in the first twelve months). These are the oldest and most simplistic form of annuities and are the least flexible. They, however, certainly may have their place in today's income planning.
A deferred annuity is purchased with either a lump sum or a series of payments. These have an account value that can be applied to provide a payout at a later date. Federal income tax is usually deferred until amounts are withdrawn, or payments begin (there are exceptions).
A variable annuity can either be an immediate or a deferred annuity. The key difference is that the account value can be invested in various investment options, and the insurance company no longer absorbs the risk involved, instead you as the account holder absorb the risk. The account value varies within the investment options and can be used to provide a payout at a later date. This type of annuity can have a variety of charges attached to it and carries risk.
A retirement vehicle that offers a guaranteed minimum interest rate and the ability to begin taking withdrawals at any time.
A retirement vehicle that combines the benefits of a traditional fixed annuity, including a guaranteed minimum rate of return, with the potential to earn additional growth linked to the return of an index.
Annuities are best suited for long term investors. Surrender charges may apply. Withdrawals prior to age 59 1/2 may be subject to an additional 10% tax penalty.
An indexed annuity should be considered a long term investment and may include, but is not limited to, asset fees, participation rates, caps, and surrender schedules. Credited interested is based upon a formula linked to the corresponding stock market index and may be more or less than the actual index performance. Indexed annuities do not include dividends. It is extremely important to note that there are a number of important factors used in determining and calculating an indexed annuity's policy values. These factors can drastically differ insurance carrier by insurance carrier and product by product.
Annuity guarantees are based on the claims-paying ability of the issuing company. Therefore, it is wise always to check a company's industry and credit ratings.
Some features mentioned herein may be available by the purchase of a rider, an optional addition to an annuity or life insurance policy that is available for an additional fee.
Does this sound confusing? It can be! Accumulating and arranging income for retirement is not an easy process. It is important to employ the expertise of a qualified financial professional. At PFG, we know that understanding annuities can be very complicated. With our background in education though, we can help simplify annuities and teach you what you need to know in a way that will allow you to be able to decide for yourself if an annuity is right for you and your financial future.