Annuities

Annuities are insurance contracts between you and an insurance company in which the company promises to make periodic payments to you, starting immediately or at some future time. Annuities are popular because they can offer tax-deferred savings for retirement and a choice of income options to meet an individual’s needs in retirement. As Americans live longer lives and have longer retirements, long-term thinking has become more essential. Many are turning to annuities to bridge the gap between savings and the prospects of a long life: Annuities are the only financial product that can turn a sum of retirement savings into guaranteed income for life. Some annuities also provide guaranteed income for a surviving spouse or dependent.

Finding a way to make savings last is a challenge for today’s workers and retirees. Fewer workers today are covered by traditional, employer-sponsored pension plans promising life-long benefits and Social Security is not likely to provide future retirees the level of benefits it provides today. Because an annuity can provide lifetime income it helps offset worries many people have about managing their finances, running out of money in retirement, or living more frugally than they need to. No other personal financial product offers guaranteed income for life.

An annuity is a flexible retirement planning tool. It can be purchased over time (through a series of premium payments) or with a single lump sum. It can accumulate value that is based on a fixed interest rate or through investments in equities. You choose how and when payouts are made to you.

Types of Annuities

  • Indexed
  • Fixed
  • Immediate

Indexed Annuities are a type of tax-deferred annuity whose return is indexed to an equity index, but which also guarantees a minimum interest rate and against a loss of all or most principal. The objective of purchasing an indexed annuity is most often to realize greater gains than those provided by fixed annuities, while still protecting principal.

Unlike traditional fixed annuities, the policy owner may receive zero interest for a single period on a specific premium payment if the index performs poorly. However, with most Equity-Indexed Annuity policies, the premiums are protected and guaranteed to grow over time. This is a feature unavailable with any form of direct participation in the marketplace, such as through a mutual fund or a variable annuity.

In better market conditions, the owner of an Equity-Indexed Annuity may experience interest credits that outperform traditional fixed annuities. Because it is an annuity rather than a mutual fund, an Equity-Indexed Annuity offers important insurance features including tax deferral, a death benefit that may be paid outside probate, and annuitization.

Fixed Annuities are the traditional form of annuities. The insurance company guarantees both the rate of return and the payout.  Fixed annuities offer a declared fixed interest rate that is guaranteed for a specific period and guaranteed to never go below a specific percentage.

Immediate Annuities are a type of annuity where you are guaranteed an income stream ranging from a specific period of time to your entire life. An immediate annuity offers a solution to the problem of outliving your money

Common Types of “Qualified” Retirement Plans

  • 401(k)
  • IRA
  • 403(b)

A 401(k) plan is an employer-sponsored retirement plan that allows you to save money for retirement while deferring income taxes on the savings until the time of withdrawal. Investments typically consist of mutual funds focusing on stocks (including, perhaps, your company’s stock), bonds, and money market funds or stable value investments.

It is called a “qualified” plan because a 401(k) account is subject to the rules specified by the IRS. These rules include limitations on annual contributions, penalties for distributions before retirement age, and other rules that may affect your ability to access or transfer funds.

An Individual Retirement Account (IRA) also allows you to save money for retirement in tax advantaged way. Like 401(k) accounts, IRAs are subject to rules specified by the IRS.

An IRA is similar to a 401(k), but an IRA can be set up without the help of an employer.

A 403(b) plan is a tax-advantaged retirement savings plan available for public education organizations, some non-profit employers, and self-employed ministers in the United States.A 403(b) plan is similar to a 401(k), but is only available to certain organizations.

What Is A Rollover?
What Is The Purpose Of A Rollover?

Many individuals have their retirement plan funds tied to mutual funds, stocks, and bonds. This means that these retirement account values are subject to market risk.

Rolling your qualified plan into an Annuity gives you a continued tax shelter, while permitting you a huge range of index options, guarantee of principle options, and living and death benefits that can protect you and/or your family whether the stock and bond markets go up or down.