Annuity

Life spans throughout the world have been increasing for over a hundred years. It’s now common for people who reach retirement age to live 20 years or more in retirement, most of those years in good health. It’s good to live a long and full life, but you want to be sure that your income lasts as long as you do, and its purchasing power is as strong as you are. How can you manage the risk of “outliving your assets”?

Annuities are a unique financial product that, along with Social Security, employer pensions, your 401(k) plan, IRA and other assets, can enhance your retirement security. Discuss this option along with your certain goal with us when mapping out your retirement strategy.

WHAT IS AN ANNUITY?

In its most general sense, an annuity is an agreement for one individual or organization to pay another a stream or series of payments. Usually the term “annuity” relates to a contract between you and a life insurance company where you invest your money, but a charity or a trust can take the place of the insurance company. Annuitization is a way to turn part of your retirement savings into a constant income stream for life.

Categories of Annuities

There are several types of annuity solutions available to consider and choose from. Whether you’re looking to increase your retirement savings for guaranteed income, or implement spousal protection or legacy planning, we can tailor a specific plan to meet your goal.

annuities CAN BE CLASSIFIED BY:

  • Nature of the underlying investment
    — fixed or variable

  • Primary purpose 
    — accumulation or pay-out (deferred or immediate)

  • Nature of pay-out commitment 
    — fixed period, fixed amount, or lifetime

  • Tax status 
    — qualified or non-qualified

annuities can be CATEGORIZED as:

  • Fixed
    — Your investment for the term expands and grows based on a guaranteed rate of return.

  • Variable
    — With potential for increased earning, but also for a bit more risk, your investment fluctuates with the returns on the fund.

  • Fixed Indexed
    — Potential for increased earnings based on index growth, with downside protection

  • Immediate / Pay-Out 
    — Pay out or convert a lump sum of payment into income streams

Key Features of Annuities

Here’s how annuities can help before and after you retire. Annuities have the following beneficial qualities and features:

TAX DEFERRAL ON INVESTMENT EARNINGS

Many investments are taxed year by year. However, the investment earnings, capital gains and investment income in annuities are not taxable until you withdraw money. This tax deferral is also true of 401(k)s and IRAs, but unlike these products, there are no limits on the amount you can put into an annuity. Moreover, the minimum withdrawal requirements for annuities are much more liberal than they are for 401(k)s and IRAs.

PROTECTION FROM CREDITORS

If you own an immediate annuity (that is, you’re receiving money from an insurance company), generally the most that creditors can access is the payments as they’re made, since the money you gave the insurance company now belongs to the company. Some state statutes and court decisions also protect some or all of the payments from those annuities. And your money in tax-favored retirement plans, such as IRAs and 401(k)s, are generally protected, whether invested in an annuity or not.

AN ARRAY OF INVESTMENT OPTIONS, INCLUDING “FLOORS”

Many annuity companies offer a variety of investment options. You can invest in a fixed annuity which would credit a specified interest rate, similar to a bank Certificate of Deposit (CD). If you buy a variable annuity, your money can be invested in stock or bond (or other) mutual funds. In recent years, annuity companies have created various types of “floors” that limit the extent of investment decline from an increasing reference point. For example, the annuity may offer a feature that guarantees your investment will never fall below its value on its most recent policy anniversary.

TAX-FREE TRANSFERS AMONG INVESTMENT OPTIONS

In contrast to mutual funds and other investments made with “after-tax money,” with annuities, there are no tax consequences if you change how your funds are invested. This feature can be particularly valuable if you are using a strategy called “rebalancing,” which is recommended by many insurance professionals. Under rebalancing, you shift your investments periodically to return them to the proportions that you determine represents the risk/return combination most appropriate for your situation.

LIFETIME INCOME

A lifetime immediate annuity converts an investment into a stream of payments that last as long as you do. In concept, the payments come from three “pockets” — your investment, investment earnings and money from a pool of individuals in your group who do not live as long as actuarial tables forecast. It’s the pooling that is unique to annuities, and it’s what enables annuity companies to be able to guarantee you a lifetime income.

BENEFITS TO YOUR loved ones and HEIRS

There is a common misconception about annuities that goes like this: if you start an immediate lifetime annuity and die soon after that, the insurance company keeps all of your investment in the annuity. That can happen, but it doesn’t have to. To prevent it, buy a “guaranteed period” with the immediate annuity. A guaranteed period commits the insurance company to continue payments after you die to one or more beneficiaries you designate; the payments continue to the end of the stated guaranteed period? usually 10 or 20 years (measured from when you started receiving the annuity payments). Moreover, annuity benefits that pass to beneficiaries don’t go through probate and aren’t governed by your will.