Annuities are simple financial instruments that allow you to spread out your savings over time, ensuring you will have money in retirement no matter what happens to the markets over the years. Here are some facts most people don’t know about annuities so you can feel confident in choosing one when you build your financial strategy.
What is an Annuity?
An annuity is a contract with an insurance company that is used to fund a future stream of payments. An annuity can be structured as an immediate income payment or as a deferred or guaranteed income. Deferred and guaranteed income products have features that make them look like traditional pensions. Even though it may look like a pension, it’s important to remember that you have not purchased any future retirement benefits from your employer; you are simply investing money into your own personal retirement account to help support yourself later in life. You will receive monthly payments during retirement, just like you would if you were receiving pension payments from your employer. This can provide some predictability around how much money you will have available each month to meet your financial goals throughout retirement.
What are the Advantages of using an Annuity in Retirement Planning?
Annuities are an excellent way to fund retirement. The advantage of an annuity is that you can set up your payments to last for a specific period. This could provide peace of mind for people who need to secure their financial futures by knowing exactly how much they have available when they need it. Additionally, if you are in your late 70s or 80s and find yourself concerned with outliving your money, an annuity allows you to convert a lump sum into income that is guaranteed over a certain period. Even better, some people prefer using annuities because they protect their assets from creditors. This could be particularly important if you live in a community property state and want to keep those assets protected during divorce proceedings.
What is a Fixed Annuity?
A fixed annuity is a tax-deferred investment that guarantees a rate of return and provides income for retirement. Fixed annuities also offer protection against market volatility in investments like stocks and bonds. Most annuities are backed by insurance companies and designed to create a steady stream of income rather than grow substantial value over time.
Equity-Indexed Annuities (EIAs)
This is a fixed indexed annuity whose payments increase or decrease based on a stock market index, such as S&P 500. Equity-indexed annuities are considered to be safe in low interest rate environments because payments will increase as interest rates drop. However, like all insurance products, EIAs carry surrender charges and fees; you may be forced to pay an early surrender fee if you make any withdrawals prior to maturity. You can also experience negative returns if interest rates go up during your lifetime but not after you have reached your retirement age. Talk with an advisor to understand which types of annuities may be best for your financial goals.
How does the withdrawal option work with Fixed and Equity Indexed Annuities?
Unlike other investment options, annuities do not require your principal to grow. For those who already have a retirement plan in place or that have already accumulated funds for their retirement, an annuity can provide guaranteed lifetime income. Customers may start taking withdrawals from their annuity at any time as long as it meets IRS guidelines for distributions. Income received through withdrawals cannot be used to purchase more insurance in an equity indexed annuity contract; however, it is allowed with fixed indexed annuity contracts. Withdrawals taken within certain IRS limits are generally taxable in different ways depending on if they are being taken from a fixed or equity indexed annuity contract.
Annuities Are the Only Financial Product That Can Guarantee Lifetime Income
An annuity is an investment that pays you a guaranteed income stream for life. This means that if you’re 70 years old and want to fund your retirement, it’s possible to set up an income stream that keeps on giving even after you die. Most people in their 60s or younger will never be able to do something like that with any other financial product. Anyone who needs guaranteed lifetime income can benefit from an annuity.
You Can Buy an Annuity with Money from Retirement Accounts
Often annuities are overlooked as a retirement tool. However, they are a great way to diversify your investments while still receiving some tax benefits. If you have money sitting in a 401(k) or IRA account, it can be used to purchase an annuity. This is because both types of accounts allow you to withdraw funds on a tax-deferred basis, so long as they are being used for qualified retirement purposes. You cannot take out any of your money early without paying taxes and penalties, but all withdrawals will go towards meeting your future needs (i.e., when you retire). As soon as you decide that an annuity is right for you, it’s time to find out how much one costs and what kind of payout options are available for investment.
State Guaranty Associations Insure Consumers If the Insurer Goes Out of Business
A state guaranty association is a private, nonprofit entity funded by insurance companies to provide financial assistance to policyholders and claimants if an insurer becomes insolvent. They are required by law in every state except New Hampshire. While each guaranty association can be slightly different, all of them have enough money in reserve to pay claims for at least one year; some associations may extend payment up to 10 years if necessary. With such security, you can rest easy knowing that your annuity will still be there when you need it. However, you should always check with your insurer on how much protection your current contract provides before making any important decisions.
Payments Do Not Always End When the Purchaser Dies
Many people who are considering buying an annuity are worried that payments will stop when they die. In some cases, that is true. The purchaser of a traditional immediate annuity can select a payment period of one, five, ten or fifteen years. Once that time period has passed, there is no option to continue receiving payments from an immediate annuity. On top of that, you will receive an income tax liability for all your payouts at once instead of your money being spread out over several years (as with other types of income streams). However, if you are looking to leave assets behind for loved ones or want to ensure inflation doesn’t erode your nest egg during retirement – another solution might be better suited for you than a traditional immediate annuity.
Taxes on Earnings Aren’t Due Until You Withdraw Money from the Annuity
Many Americans love Roth IRAs, but even a Roth IRA doesn’t have growth potential as large as a tax-deferred annuity. While it may sound strange, with an annuity you only pay taxes on your earnings after you make withdrawals from your account, and even then, it is subject to some pretty big exceptions. For example, if you’re age 59 1/2 or older and are withdrawing money for either a qualified long-term care expense or qualified medical expenses, then you won’t owe taxes on those withdrawals either. It pays to do your research before investing in an annuity and make sure that whichever one you choose fits your financial goals!
Have Additional Questions? Contact AIB Today!
For me information, contact Jeannie Knapp, Annuity Sales Coordinator, at (800) 695-8224 x136 or via email jknapp@advisorsib.com.