With approximately half of my clients being retired, or very close to it, many people ask about annuities.
When used properly, annuities can be a great tool to secure retirement, create a personal pension, and even defer taxes. Similar to Social Security payments and pensions, an annuity can provide you with a guaranteed stream of income that could last your entire life. With an annuity, you are exchanging a lump sum of money for guaranteed lifetime income. It’s interesting – years ago, when George W Bush pushed the idea of privatizing some of Social Security, there was a big outcry. The loudest objection was that we would be sacrificing a guaranteed payment in exchange for market-like returns (and its associated risk). I could never understand this outcry, given that the proposal was for an optional arrangement – giving workers the opportunity (not mandated) to obtain higher payouts on their SS checks, in exchange for higher risks. But in the end, people just did not want to sacrifice a “sure thing.” So, we, as Americans, like the sure thing of a guaranteed Social Security check, or a pension payout, yet for some reason are reluctant to purchase annuities.
There are three basic types of annuities – fixed (or immediate), indexed, and variable.
With an immediate annuity, you are exchanging a lump sum of money for guaranteed stream of income. For example, a 67-year-old woman can exchange $250,000 for approximately $1,450 per month of lifetime monthly income. Alternatively, for a higher fee, she can start out at $1,170 per month, and that value would increase by 2% per year to have some inflation protection. One objection I hear is “well, what if I die after three years? Does the company just keep all that money?” Well, there are ways to protect that scenario. For example, instead of the $1,450 per month as previously stated, you could accept $1,275 per month, and then you or your estate would receive either lifetime payments, or payments for 20 years (whichever is longer).
An index annuity can provide the annual returns of a chosen index, with a cap on the upside return. In exchange for the cap, your principal is guaranteed, should the market decline.
Variable annuities allow you to invest in investment sub-accounts, and are subject to the same ups and downs of the market. Many variable annuities also offer an array of other benefit options for a fee, such as “living benefit options.” These options could provide guaranteed credits, or lock ins of market returns, as you are accumulating assets, and also provide a guaranteed lifetime income that could, potentially, increase over time if the markets are positive.
One commonality of all annuities is that the earnings grow tax deferred, potentially making them a good tool to have in your retirement planning toolbox.
An annuity may be an attractive option for investors looking for guarantees in a volatile market. Contact me and we can discuss whether it’s right for you.
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Annuities are long-term, tax-deferred investment vehicles designed for retirement purposes. Guarantees are based on the claims-paying ability of the issuer. Withdrawals made prior to age 59½ are subject to a 10- percent IRS penalty tax, and surrender charges may apply. Gains from tax-deferred investments are taxable as ordinary income upon withdrawal. The investment returns and principal value of the available subaccount portfolios will fluctuate, so the value of an investor’s unit, when redeemed, may be worth more or less than the original value. Optional features available may involve additional fees.