Income For LIfe
Company pension plans are less common today than in the past. Most people need to be concerned about providing for their own income in retirement. One financial vehicle that can function as a private retirement plan is an annuity.
An annuity is a product sold by an insurance company or other organization which promises to pay you a certain amount of money, on a periodic basis, for a specified period. The purpose of an annuity is usually to provide guaranteed income later in life, especially during retirement. Depending on the product, you may choose to “annuitize”—begin receiving payments—immediately or in the future. Payments may be made as a single lump sum, over a specified number of years, or for life.
If you are concerned about having enough income during retirement, an annuity may be one way to provide financial certainty.
Annuities offer principal protection and potential interest to help you accumulate money for retirement. Money in the annuity can grow tax-deferred, reducing the burden of saving during your working years. Annuities also offer valuable guarantees and death benefit protections. If you surrender your contract, you’ll receive at least a guaranteed minimum value. And you have the assurance that the issuer will pay benefits to your beneficiaries if you pass away before you start receiving payments.
Fixed, Variable, and Indexed Annuities
A fixed annuity guarantees that you’ll make a stated interest rate on your money. This type of investment is virtually risk-free for the investor. Fixed annuities are not related to the stock market, so you won’t suffer from a downturn, but you won’t benefit from an upturn, either. Most fixed annuities allow you to withdraw up to 10% a year, prior to annuitization, without an early withdrawal penalty. Fixed annuities are not securities and are not regulated by the SEC.
A variable annuity typically guarantees a minimum income stream, through a guaranteed income benefit option, and offers an excess payment amount that depends on the performance of the annuity’s investments. You receive larger payments when your managed portfolio delivers high returns, and smaller payments when it does not. Variable annuities may offer a balance between guaranteed retirement income and continued growth opportunities. Variable annuities are securities regulated by the SEC.
An indexed annuity (or fixed index annuity) credits your account the rate of return that is realized on a certain index, such as the S&P 500 Composite Stock Price Index. Because the chosen index varies daily and is not predictable, the interest you earn could be more or less than the interest from a traditional fixed annuity. Many indexed annuities let you allocate a portion of your premium to a traditional fixed interest option. The issuing company also guarantees a minimum return, regardless of index performance. Common benefits of indexed annuities include: protecting your principal and any credited interest (your accumulation value) from market losses; allowing you to withdraw up to 10% a year, prior to annuitization, without an early withdrawal penalty; optional death benefits under which, if you die early, the annuity goes to your beneficiaries and avoids probate; and taking 100% of the annuity without penalty if you must go into a nursing home. An indexed annuity may or may not be a security; however, most indexed annuities are not registered with the SEC.
Some annuities offer other provisions, such as a guaranteed number of payment years. If you (and your spouse, if applicable) die before the guaranteed payment period is over, the issuer pays the remaining funds to your estate. Naturally, added guarantees tend to reduce the size of payouts.
There are potential drawbacks to annuities, including surrender fees for early withdrawal, and annual fees that may apply.
Ask Yourself:
How will I use this annuity? If you are retired or nearly so, you may wish to consider a fixed annuity for steady income. If you are still working, consider fixed, variable, and indexed annuities to save for the future. Do you have children or grandchildren? Consider death benefits.
Will I need the money right away? If you are going to need the money in the next two to five years, look carefully at surrender fees to determine whether a particular policy is right for you.
Annuities offer tax-sheltered growth, which can result in significant long-term returns if you contribute for a long period and wait to withdraw funds until retirement. You get peace of mind from an annuity’s guaranteed income stream, and the tax benefits of deferred annuities can amount to substantial savings. Variable annuities provide market growth opportunities to those retirees who can afford the risk. Annuities can be a valuable part of your overall investment strategy.