Your retirement years should be spent simply enjoying life, not constantly worrying about whether your money will last. However, with people living much longer than previous generations, combined with the rising cost of healthcare and overall inflation, it’s an issue we must confront. If you’re concerned about outliving your income, one financial product to consider is an annuity: a type of insurance contract that can help provide retirement income for as long as you live.
Annuities can act like life insurance’s counterpoint. Whereas life insurance offers financial protection in the event of “dying too young,” annuities offer financial protection against “living too long.” If set up correctly, an annuity can provide income for the rest of your life, whether you live to be 80 or 120. However, there are many types of annuities to choose from, each with its own pros and cons, so it’s important to be an educated buyer.
If you’d like to discuss whether annuities make sense as part of your personal retirement strategy, contact Winter & Associates! Our experienced financial professionals will provide insight on each type of annuity, help you “shop the market,” and offer advice based on decades of financial problem-solving and client relations expertise. With us on your side, you can feel confident about your retirement decisions. Call us today: 651-414-5000.
HOW ANNUITIES WORK
Though annuities are highly customizable, annuities are used to navigate through two phases of life: accumulation and income distribution.
- Accumulation - You purchase an annuity (available through insurance companies and their independent brokers) either in a single lump sum or series of payments, depending on the type of annuity. Your contribution then earns interest that is tax-deferred (no taxes are owed until you withdraw the money from the annuity).
- Income Distribution - When you opt to receive payments from the annuity, you enter the payout phase. Your accumulated interest and principal is turned into a stream of income you can choose to receive monthly, quarterly, annually, or even as a lump sum. You, the annuitant, can also choose whether you want to receive payments for the rest of your life, over the lifetime of both you and your spouse, for a certain number of years, or some combination thereof.
While annuities aren’t a perfect tool for everyone and may not take care of all your financial needs in retirement, they can be used to supplement your social security income, pension plan, or other investments. If you do not have a pension, as is the case for many people in today’s workforce, an annuity is the ideal vehicle to help you create your own “private” pension. The decisions you make about the details of your annuity determine the amount of payout you’ll receive.
Want to learn more and speak to a trustworthy financial professionals? Give us a call at 651-414-5000, or connect with us online to book an appointment. We’re located at 121 Farrington Street in Saint Paul, Minnesota.
TYPES OF ANNUITIES
Annuities can be defined as income from a capital investment paid in a series of regular payments. In actuality, annuities are unique financial vehicles that can guarantee you will not outlive your income. This is why they are frequently used as a tool in a retirement strategy. Annuities have two phases with multiple choices and options for both phases.
There are three main types of annuities. They allow for accumulation on a tax-deferred basis and can help generate income for life or a guaranteed period: fixed annuities, variable annuities, and equity indexed.
- Fixed Annuity – In exchange for a lump sum of capital, a life insurance company credits the account with a guaranteed fixed interest rate while also guaranteeing the principal investment amount. With a fixed annuity, it can be annuitized so the amount you receive each month (or quarter or year) can’t go down, making fixed annuities a good fit for those with a lower risk tolerance.
- Variable Annuity - With a variable annuity, the money you pay up front can be invested in a variety of accounts, from conservative to aggressive. The returns you receive rise and fall with the performance of the fund you invested in, making variable annuities a better fit for those with a higher risk tolerance.
- Equity Indexed Annuity – With an equity indexed annuity, some features of the fixed and variable products are combined. It is a type of fixed annuity, but the potential interest yield is based on an equity index (typically the S&P 500, but there are many to choose from). They are appropriate for moderately conservative investors who like having the possibility of earning higher investment returns, while still having some downside protection.
Because there are so many different types of annuities and they can have penalties for early withdrawals, it’s important you consult with a trustworthy financial professional to determine what type of annuity is best for your situation. Contact us today to book an appointment!
ANNUITY PAYOUT OPTIONS
Along with selecting which type of annuity is right for you, you must choose between an immediate or deferred payment. An immediate annuity begins paying out as soon as you make the initial lump sum investment, while a deferred annuity beings paying out on a future date set by you, the policy owner.
You can take money out of an annuity contract in two ways:
Annuitization: Turn the contract into an income stream by annuitizing and beginning to receive planned periodic payments.
Things to consider:
- Guarantees you income for life and/or a set period of time, so you cannot outlive your income.
- The income can be higher than other traditional investments because annuities are underwritten by life insurance companies and tied to life expectancy.They calculate the guaranteed income you receive based upon your age. The older you are the higher the income will be.
- No access to the principal under this scenario. Once you begin any annuitization option, you are unable to alter it. Annuitization will maximize your income over your lifetime with a guaranteed rate of return.
- There are several annuitization options including life only, life with a period certain, joint life with you and your spouse, etc.
Withdrawal: Another way to take money out of an annuity is by a withdrawal. You can simply withdraw any amount – from one dollar to the full account balance – on a monthly, quarterly, semi-annual, or annual basis.
Things to consider:
- You can withdraw money on an arbitrary or periodic/scheduled basis in a lump sum or in the form of planned payments.
- The danger to this option: if your withdrawal rate exceeds the annuity product rate of return, you dip into principal, and eventually deplete the balance in the account and run out of money.
- If you die at any time during the withdrawal period, your heirs would receive the remaining balance in the annuity.
- The withdrawal option has no guarantees but allows more flexibility with access to principal.
- Annuities can offer special withdrawal riders that allow you to lock in on a guaranteed base income percentage that will never decrease and that you cannot outlive. This is achieved without having to annuitize the contract.
If you want to spend your retirement years living in the present rather than worrying about the future, contact Winter & Associates today to discuss how an annuity can help simplify your retirement income. By sitting down with you and asking a few basic questions, our financial professionals can help determine whether annuity income makes sense as part of your personal retirement strategy, and help you select the annuity income option that’s right for you.
An annuity is intended to be a long-term, tax-deferred retirement vehicle. Earnings are taxable as ordinary income when distributed, and if withdrawn before age 59 ½, may be subject to a 10% federal tax penalty. If the annuity will fund an IRA or other tax-qualified plan, the tax deferral feature offers no additional value. Qualified distributions from a Roth IRA are generally excluded from gross income, but tax and penalties may apply to non-qualified distributions. Please consult a tax advisor for specific information. There are charges and expenses associated with annuities, such as deferred sales charges for early withdrawals.
Variable annuities have additional expenses such as mortality and expense risk, administrative charges, investment management fees and rider fees. Variable annuities are subject to market fluctuation, investment risk and loss of principal. All guarantees are subject to the financial strength and claims paying ability of the issuing insurance company, and the guarantees have no bearing on the variable investment performance. The variable investment performance can lose value.
You should consider the investment objectives, risks, charges and expenses of a portfolio and the variable insurance product carefully before investing. The portfolio and variable insurance product prospectuses contain this and other information. You may obtain a copy of the prospectus from your representative. Please read the prospectuses carefully before investing.