Annuities – Safe Money
Annuities… the first step towards Safe Money!
Annuities are an important part of any retirement plan as they are safe, secure and risk free. An annuity allows you to accumulate funds for retirement on a tax-deferred basis, and upon retirement if desired you can receive income from the annuity that can be guaranteed by the insurer to last either a fixed number of years, or as long as you live.
A quick summary of annuity benefits includes:
- Tax deferred earnings
- No contribution limits
- Flexibility in distribution / payouts
- No forced distributions
- Proceeds not subject to probate
Annuities represent a formidable option for someone looking to enhance their retirement planning strategy. Not only do they add to the mix of tax-deferred growth you may be getting from your IRAs or 401(k)s, but they also offer significant investment and distribution options. An annuity can be a good place to roll your 401K or IRA as well.
There are many types of annuities, offered by many insurance companies. The first step is to speak with a qualified professional to receive an annuity quote so you can best gage how an annuity would fit into your specific financial plan.
What is an Annuity?
An annuity is a contract offered by an insurance company that allows you to accumulate funds on a tax deferred basis. If and when you desire you’ll receive income from the annuity that can be guaranteed by the insurer to last either a fixed number of years, or as long as you live.
You can also elect to just take withdrawals whenever the need arises. An annuity is neither life insurance nor a health insurance policy, and it’s not a savings account or a bank Certificate of Deposit. Your value in an annuity contract equals the premium payments you pay in, plus interest credited, less any applicable charges.
Types of Annuities
Fixed Deferred Annuity
A fixed deferred annuity pays a guaranteed “fixed” interest rate (based on the current market rates of interest) where the earnings compound and grow tax-deferred. Fixed annuities offer safety of your principal from typical day-to-day market fluctuations in the stock, bond or other investment markets. However, since this rate of return is fixed, it is important to consider the impact of inflation on your investment. You will also want to consider the financial strength of the annuity-issuing insurance company, since the return of principal and interest is guaranteed by them. Several independent financial analysis companies such as A.M. Best and Standard & Poor’s rate the strength of such insurance companies for you.
An equity-indexed annuity differs from a fixed deferred annuity in that the rate of return on your investment is based upon the better of either a) the growth of a named stock market index, such as the Dow Jones Industrial Average, or b) a minimum guaranteed interest rate.
Many equity-indexed annuities offer you a portion (not a full 100%) of the index gains. Still, this type of annuity does allow for potentially higher returns than a typical fixed annuity, since you can participate in a rising stock market, yet be protected on the downside by the minimum guaranteed rate of return.
A variable annuity allows the flexibility to invest your funds in a wide range of investment options through “sub-accounts.” Sub-accounts are somewhat similar in design to mutual funds, and allow for investing in stocks, bonds, money markets – even guaranteed fixed rate instruments.
The ability to choose, and change, investment options provides you the advantage of participating fully in any market gains (not fractionally), thus potentially providing even higher returns than equity-indexed annuities. However, unlike equity-indexed annuities, many variable annuities offer no guaranteed rate of return. Therefore, the value of the variable annuity and its sub-accounts will fluctuate day-to-day, based on the performance of the underlying investments you choose. Unlike a fixed deferred annuity, your funds are not guaranteed by the insurer against market fluctuations, including risk of principal.
An immediate annuity is most appropriate for people who want to:
- Retire in the very near future, or are already retired
- Begin drawing an income from a lump sum of money that they currently have
- Receive an immediate and predictable payout for life (based on life expectancy)
The immediate annuity allows you to deposit a lump sum and begin receiving regular payments normally within one year after the deposit. It is usually funded with a single premium, and purchased by retirees with funds they have accumulated for retirement. These annuities can provide a predictable stream of payments that will continue for a time period you choose (including for life).
Qualified vs. Non-Qualified Annuities
The way your payouts are taxed differs for qualified and non-qualified annuities.
A tax-qualified annuity is one used to fund a qualified retirement plan, such as an IRA, Keogh plan, 401(k) plan, SEP (simplified employee pension), or some other retirement plan. The tax qualified annuity, when used as a retirement savings vehicle, is entitled to all of the tax benefits—and penalties—that Congress saw fit to attach to such qualified plans.
A non-qualified annuity is purchased with after-tax dollars. You still get the benefit of tax deferral on the earnings. However, you pay tax on the part of the withdrawals that represent earnings on your original investment. With a non-qualified annuity, you are not subject to the minimum distribution rules that apply to qualified plans after you reach age 70½.
Safe Money is an answer… but not the “only” answer
The financial decisions we each need to make will be made based on a combination of factors and variables unique to each of us. The idea of “safe money” however, is a theme that is common to everyone. We all need retirement options that include guaranteed income that cannot be outlived, inflation protection, safety, security, and risk management. These options should be blended with versatility and the ability to make necessary changes and adjustments over a period of time. As we point out with all our reports, we strongly advise you to speak to a qualified financial professional to discuss the specific options available to you that fit your retirement needs. We live in a different era than our parents, and the products, options and strategies available reflect that. The changes we are experiencing make planning for retirement complex and time consuming, but how you respond and adapt to these changes is undoubtedly one of the most important things you’ll do in your life. We all have dreams of how we want our retirement years to be. With careful planning you’ll be in a better position to realize those dreams.