If you’re preparing for retirement, you are likely familiar with the broad range of tools that can be used to accumulate assets, manage income and provide a sound financial foundation. From IRAs to 401(k) plans to long-term care insurance and more, there are many financial strategies at your fingertips.
Annuities are one tool used by retirees and those approaching retirement. While annuities offer a number of specific benefits, they are often viewed with skepticism. They may seem confusing or overly complex. You may feel they pose risks or that they may not fit your situation.
Before you rule out an annuity, though, you may want to learn more. Annuities can be helpful with a number of retirement challenges, such as minimizing taxes and providing income. Below are some basic questions and answers on annuities to help you get acquainted with the idea:
How do annuities work?
An annuity is an insurance-based product that’s used to generate income, either immediately or at some point in the future. You contribute money into the annuity policy via premiums. Many annuities are funded with single, lump-sum premiums, but others may allow you to make additional premiums later.
Then, when you’re ready, you can take income from the annuity. The income amount is based on the unique terms of your policy. In some cases, the income may be based on an interest rate or market returns. In other policies, the income amount is guaranteed for life.
While annuities can be very helpful as income tools in retirement, there are important points to consider before moving forward. Many annuities have what’s called a surrender period. This is a period of time in which you may have to pay a penalty if you surrender your policy or take a withdrawal. For this reason, you may not want to consider an annuity if you don’t have other sources of liquid funds.
Are there different types of annuities?
There are a few different types of annuities, each serving its own specific purpose. An immediate annuity is one in which the premium is immediately converted into a stream of income. In that example, you contribute money to a policy and the insurance company then calculates an income payment based on the premium, your life expectancy and other factors. You then receive the income for the specified period, which could be the rest of your life.
There are also deferred annuities, in which your premium grows for a period of time before it’s converted into income. In variable** annuities, the growth is tied to investment performance. In fixed annuities, you receive interest and don’t have market exposure. Indexed annuities blend the two, with interest paid based on a selected market index return.
There are many different types of annuities to choose from. Do your due diligence before selecting a policy.
What are the potential advantages of using an annuity?
The benefits of an annuity depend largely on the type of annuity you choose. Tax treatment is one of the most common benefits across most types of annuities. Annuities are considered to be tax-deferred, much like other qualified accounts. That means you don’t pay taxes on growth as long as the funds stay inside the annuity.
Another potential benefit is guaranteed income. Many annuities offer various options that provide lifetime guaranteed* income streams. You can use an annuity to convert a portion of your retirement savings into income that’s guaranteed to last through your retirement.
Ready to learn more about whether an annuity is right for you? Let’s talk about it. Contact us today at MasterPlan Retirement Consultants. We can help you analyze your needs and identify the right strategies. Let’s connect soon and start the conversation.
MasterPlan Retirement Consultants proudly serves the financial needs of those in Canton, Georgia and the surrounding areas.
*Guarantees, including optional benefits, are backed by the claims-paying ability of the issuer, and may contain limitations, including surrender charges, which may affect policy values.
**Investors should consider the investment objectives, risks, charges and expenses of a variable annuity and its underlying investment options. The current prospectus and underlying prospectuses, which are contained in the same document, provide this and other important information. Please contact our Investment Professional or the issuing Company to obtain the prospectuses. Please read the prospectuses carefully before investing or sending money.
Licensed Insurance Professional. This information is designed to provide a general overview with regard to the subject matter covered and is not state specific. The authors, publisher and host are not providing legal, accounting or specific advice for your situation. By providing your information, you give consent to be contacted about the possible sale of an insurance or annuity product. This information has been provided by a Licensed Insurance Professional and does not necessarily represent the views of the presenting insurance professional. The statements and opinions expressed are those of the author and are subject to change at any time. All information is believed to be from reliable sources; however, presenting insurance professional makes no representation as to its completeness or accuracy. This material has been prepared for informational and educational purposes only. It is not intended to provide, and should not be relied upon for, accounting, legal, tax or investment advice.
Annuities are insurance products backed by the claims-paying ability of the issuing company; they are not FDIC insured; are not obligations or deposits of, and are not guaranteed or underwritten by any bank, savings and loan or credit union or its affiliates; are unrelated to and not a condition of the provision or term of any banking service or activity
Guaranteed lifetime income available through annuitization or the purchase of an optional lifetime income rider, a benefit for which an annual premium is charged. Annuities are long-term, tax-deferred vehicles designed for retirement and contain some limitations.
Annuities are designed to be long-term investments and can involve charges such as administrative fees, annual contract fees, rider fees, mortality & risk expense charges and surrender charges. Early withdrawals may be subject to surrender charges and can impact annuity cash values and death benefits. Taxes are payable upon withdrawal of funds. An additional 10% IRS penalty may apply to withdrawals prior to age 59 ½. Annuities are not guaranteed by FDIC or any other governmental agency and are not deposits or other obligations of, or guaranteed or endorsed by any bank or savings association. When considering replacing or transferring out of an annuity it’s important to understand what costs may be incurred such as surrender charges and the loss of death and/or income benefits.
Investments in variable annuities will fluctuate and values upon redemption may be less than the original amount invested. Investors should consider the investment objectives, risks, charges, and expenses of a variable annuity carefully before investing. Prospectuses containing this and other information about the annuity are available by contacting your registered representative. Please read the prospectus carefully before investing to ensure the annuity is appropriate for your goals and risk tolerance.
Investments in fixed indexed annuities are affected by changes in a stock or fixed index over the crediting period. Even though changes in the index affect the interest credited to the fixed indexed annuity policy, an fixed indexed annuity is not an investment in the stock market and does not participate in equities, commodities, fixed income or currencies.Fixed indexed annuities may be subject caps, spreads, administrative fees and/or participation rates that will limit and/or lower the amount of interest that is credited to the fixed indexed annuity. Withdrawing more than the guaranteed annual withdrawal amount on an annuity with an income rider can reduce the future guaranteed annual withdrawal amounts.
Investment advisory services offered through MasterPlan Retirement Consultants, Inc. a Registered Investment Advisor in the state of Georgia. Insurance products & services offered through Fricks and Associates, Inc. MasterPlan Retirement Consultants, Inc. & Fricks and Associates, Inc are affiliated companies.
MasterPlan Retirement Consultants, Inc. & Fricks and Associates, Inc are not affiliated with or endorsed by the Social Security Administration or any government agency.
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