Annuities
Annuities are financial contracts with an insurance company that are designed to be a source of retirement income.
Single vs. Flexible-Payment Annuities
You can purchase an annuity in two ways:
- Make one lump-sum payment to purchase a single-premium annuity. If you want to contribute more money at a later date, you will have to purchase another annuity.
- Make ongoing contributions to a flexible-payment annuity. You can contribute money at regular or even irregular intervals anytime you want.
Fixed vs. Variable Annuities
There are two basic types of annuities you can buy - fixed and variable.
Fixed Annuities
Fixed annuities earn a guaranteed rate of interest for a specific time period, such as one, three or five years. Once the guarantee period is over, a new interest rate is set for the next period. This guarantee of both interest and principal makes fixed annuities somewhat similar to Certificates of Deposit (CDs) purchased from a bank. Unlike a typical CD, however, an annuity is not backed by the Federal Deposit Insurance Corporation (FDIC); its security is directly related to the financial health of the insurance company that issues the annuity.
Variable Annuities
Variable annuities typically offer a range of investment or funding options. These funding options may include stocks, bonds and money market instruments. The return on variable annuities can go up or down. Your principal and the return you earn are not guaranteed; they depend on the performance of the underlying investment options.
Variable annuities also allow you to transfer money from one account to another without triggering a taxable event. In other words, if you transfer money to a different funding option within your variable annuity, you will not have to pay taxes on any earnings you have made. Tax-free switching lets you re-allocate money to suit changing market conditions, without worrying about taxes.
Variable annuities are long-term investments designed for retirement. The value of the variable investment options will fluctuate and when redeemed may be worth more or less than the original cost. Investors should carefully consider a variable annuity’s risks, charges, limitations and expenses, as well as the risks, charges, expenses and investment objectives of the underlying investment options. This and other information is in the prospectus that should be read carefully by clients before investing.
Deferred vs. Immediate Annuities
While you can put money into a deferred annuity with a single payment or flexible payments, immediate annuities are usually purchased with a single payment. When you receive payments also differs. Just as the names imply, you get money earlier from an immediate annuity and you delay getting money from a deferred annuity.
This easy quiz will help you determine whether you should consider an immediate or a deferred annuity. Answer the following statements:
| 1. Saving for retirement is one of my main goals. |
Yes No |
| 2. I do not want to touch my principal or interest until I am at least 59 1/2 years old. |
Yes No |
| 3. I contribute the maximum deductible amount to my IRA,401(k) or 403(b). |
Yes No |
| 4. I need an investment that will earn tax-deferred interest for many years. |
Yes No |
| 5. I am retired or very near retirement now. |
Yes No |
| 6. I have lump sum of money and I want to begin drawing an income from it. |
Yes No |
| 7. I want immediate return from my investment. |
Yes No |
| 8. I want to receive a steady monthly check for the rest of my life. |
Yes No |
If you answered yes to questions 1 through 4, a deferred annuity may be appropriate for you.
If you answered yes to questions 5 through 8, you're more likely to need an immediate annuity.
A financial advisor or qualified insurance agent can help you decide if an annuity is the right retirement savings vehicle for you.
Deferred Annuities
Deferred annuities can be a great way to accumulate money for retirement, if you want retirement income beyond what you will receive from Social Security or your pension plan. Your money grows tax deferred, which means you pay no taxes on earnings until you begin to withdraw your money.*
*Note: Unlike a nonqualified deferred annuity purchased with after-tax dollars, an IRA receives tax deferral under the provisions of the Internal Revenue Code. Therefore, there is no additional tax benefit in purchasing a deferred annuity for an IRA.
Withdrawing Money from a Deferred Annuity
When you're ready to start withdrawing money from your deferred annuity, you will need to choose how to receive your money. You can take it all out in a lump sum, take it as needed, or receive it in a steady stream of periodic payments - so-called "annuitizing." If you annuitize, you can receive a stream of income that is guaranteed to continue for the rest of your life, no matter how long you live. And, the tax liability can be spread out for the rest of your life too.
Some of the earnings are included in each payment and are taxable, meanwhile, any earnings continue to accumulate tax-deferred on the remaining principal and earnings that have not yet been distributed. So, receiving distributions as periodic payments after retirement may further reduce your income tax liability, if you are in a lower tax bracket. Some annuities also provide you with an option to have a set amount, determined by you, automatically withdrawn and deposited directly in your bank account during a regularly scheduled period, such as monthly. You have many options on how you receive your money.
Why Buy a Deferred Annuity?
There are a number of good reasons to consider a deferred annuity as part of your financial retirement plan:
- You postpone paying income taxes on any earnings until you withdraw money, typically during retirement, when you may be in a lower tax bracket. All earnings grow tax-deferred.
- You can put in as much money as you want. Unlike Individual Retirement Accounts (IRAs), there is no IRS restriction on the amount that can be contributed annually to deferred annuities with your after-tax money.
You can provide death benefits to your heirs. If you die prematurely, your annuity can offer a death benefit to your beneficiaries without the costs and delays of probate. Your beneficiaries will never receive less than what you have contributed (less any withdrawals).
Immediate Annuities
Immediate annuities can provide dependable financial security: a stream of income payments guaranteed to continue for the rest of your life or for a period you select.
Why Buy an Immediate Annuity?
Among the reasons to consider an immediate annuity are the following:
- An immediate annuity is a financial vehicle that can provide guaranteed income for life.
- The income payments you receive can supplement your other income sources, such as Social Security and pension payments, which may not provide enough income by themselves.
- You choose how often to receive your income payments. Whether monthly, quarterly, semi-annually or annually, there's a payout plan to fit your particular needs.
- You pay income taxes only as you receive your payments.
- You may lessen your financial worries. Because you don't know how long you'll live, it's hard to be sure your resources will last as long as you need them. If you withdraw too much of your nest egg, your future income can suffer or you may run out of money entirely. If you are too thrifty when it comes to spending your nest egg, your standard of living may suffer. Immediate annuities can remove some of these burdens by providing you with a predictable fixed payment for life, so you can concentrate on enjoying your hard-earned retirement.
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