Annuity

What Is An Annuity?

People often ask, what is an annuity? How do annuities work? Is an annuity right for me? These are questions we often get and ones we love answering for our clients.  

From their humble beginnings, they were designed to provide lifetime monthly payments to the holder in exchange for giving the life insurance company a lump sum of money to manage and invest.  

Fortunately, just like all financial products, they have evolved over time. 

Today’s annuities are:

  • More agile to meet the changing needs of consumers and; 
  • Offer more options and control to the owner

Modern annuities can deliver tax-deferred growth, income, liquidity and the ability to participate in market growth without the risk of incurring a market loss. 

Why Are Annuities Important?

Annuities are important because they serve as the backbone of any sound retirement plan. Several popular income planning approaches use these financial products as a “Floor” to guarantee essential expenses are covered in retirement. In fact, this is called the “Flooring” approach. 

Annuities ensure, if the worst were to occur, your essential expenses are covered. There is much more these financial products can do than this but ensuring expenses are covered and that you will not run out of money during retirement is why they are so crucial to your retirement plan.

Is An Annuity Right For You?

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Annuities Can Provide Growth and Income

Growth of assets

Annuities focused on growth allow an annuitant to grow their contributions tax-deferred for a set period of time. Funds can then be redeployed into other financial vehicles or left to grow.

Income for life

Annuities focused on income allow an annuitant to create strategies for maximizing guaranteed lifetime income. 

What Are The Different Types Of Annuities?

Fixed Annuity

A traditional type where the principal and the rate of return is guaranteed by the insurance company. This is very similar to bank CDs that offer protection against market volatility.  Fixed annuities can be either immediate or deferred if delayed income is desired. Interest earned is tax deferred until income payments begin.

A newer type that provides the opportunity for tax-deferred growth based in part on changes in a chosen market index while protecting your principal from market volatility. Index annuities enjoy the benefits of participating in market growth while protecting the principal when the market declines. Additionally, most policies offer a guaranteed minimum interest credit. They can be either immediate or deferred.

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Variable Annuity

Provides the opportunity for tax-deferred growth based on direct market performance. A variable annuity is linked directly to the market and assets are wrapped typically in mutual funds or similar vehicles for investment growth. Variable annuities are subject to potential gains or loss depending on the performance of the market and are only sold by SEC licensed individuals.

Are there annuity strategies for generating lifetime guaranteed income?

Frequently Asked Questions

Yes. One of the biggest advantages annuities offer is they offer tax-deferred growth of savings. And unlike other tax-deferred retirement accounts such as 401(k)s and IRAs, there is no annual contribution limit for an annuity. That allows you to put away more money for retirement and is particularly useful for those that are closest to retirement age and need to catch up. The money you invest compounds year after year without any tax bill from Uncle Sam. The ability to keep every dollar invested working for you can be a big advantage over taxable investments. When you cash out, you can choose to take a lump-sum payment from your annuity, but many retirees prefer to set up guaranteed payments for a specific length of time or the rest of your life, providing a steady stream of income. The annuity serves as a complement to other retirement income sources, such as Social Security and pension plans.

Another advantage is the ability to use annuity funds penalty free for chronic or terminal illness expenses. 

Annuities also offer peace of mind. This is hard to quantify but knowing you cannot outlive your money as well as having a consistent paycheck in retirement truly adds to feeling secure and sleeping well art night!

Not all annuities are created equal. Variable annuities may contain high fees that are paid year after year.

You may likely face a surrender charge for pulling money out of an annuity within the first several years after you buy it. The fee generally declines by one percentage point a year until it gets to zero after year seven or eight years. If you think you will need access to your funds short term, it may be better to wait to invest in an annuity. Like with all saving programs, you need to be able to let it sit and grow.  With that said, many new policies have features that allow for penalty free withdrawals each year to offer some degree of liquidity.

Yes. Money that you invest in an annuity grows tax-deferred. When you eventually make withdrawals, the amount you contributed to the annuity is not taxed, but your earnings are taxed at your regular income tax rate. This should not be considered tax advice. Any specific tax questions should addressed with a tax professional (CPA).