Annuities

Most people look forward to the day they can retire. No more daily grind. No more meetings. No more stress. But what about the uncertainties of a bad market? You’ve probably put some money away for retirement—but what about making sure that money lasts?

What Are Annuities

Annuities might be a foreign concept, but once you understand the basics, things get pretty simple. In the same way mutual funds simplify diversifying your investments, annuities simplify getting your money when you actually need it—in retirement. They’re a way to help make sure you can have a steady stream of income, even if the market doesn’t exactly perform the way you want it to. Annuities work like this. You pay money to an insurance company, and then they invest it. Over time, they’ll pay you back while offering tax advantages. You won’t pay taxes until the earnings on the funds are paid out to you. You choose how much you’ll contribute, when you want to start receiving payments, and how long they need to last. The upside is that there aren’t many surprises. There’s an income you can count on month after month, and in a good market, some annuities earn positive returns for a higher payout.

Fixed Annuities

There are very few guarantees when it comes to investing. But when you’re planning for the long term, that might be exactly what you want. With a fixed annuity, you’ll always know what your money is earning—even in a rocky economy. The Details Here’s what you need to know about fixed annuities. The money you put in gets you a guaranteed rate of return for a certain period of time. Since an annuity is issued by an insurance company, they handle all the investment decisions. They’ll pay you the interest rate they promised, no matter how the investments perform. Remember, one benefit of an annuity is a steady stream of income. And since the rate is guaranteed and fixed, you’ll know exactly what your income is going to be, which can be a huge relief. (If you still want some growth potential but don’t want to give up the guarantee, you might want to look into an variable annuity.) Why They’re a Good Idea Fixed annuities can be a great solution for people looking for guaranteed income later in life.
  • They offer a guaranteed rate of return on your investment.
  • The money earned by the annuity won’t be taxed until you start receiving payments.
  • If you need to access your money early, you can typically withdraw up to a certain amount each year without paying a fee.
  • They let your money grow faster by having deferred taxes.
An annuity can also help make things easier for your spouse or children if you die. Usually, your estate would have to go through a legal process before your beneficiaries can access it. With an annuity, they won’t have to wait. 

If this happens before you start receiving annuity payments, your beneficiary will get a “death benefit” that usually equals the total value of the annuity. If you’ve already started to receive payments, the remaining guaranteed payments will go directly to your beneficiary. Factors to Consider There are several types of annuities out there, but choosing one isn’t too hard. A fixed annuity could be just what you’re looking for if: You want the security of principal protection and guaranteed rates. You’re concerned about outliving your money. You’re changing jobs or retiring. You don’t want to manage large amounts of money on your own. You make sure your spouse or children are taken care of financially. Common Questions Why is tax-deferral important? Tax-deferral means you won’t pay taxes on the money earned by your annuity until you start getting payments. If you’re in a lower income-tax bracket when you start getting payments from your annuity, you’ll pay less marginal income tax on the money you earn. What is the “guarantee period”? Your fixed annuity offers a guaranteed rate for a certain period of time, which you choose when you buy it. If you still want a guarantee when that period is up, you can renew at a new rate. Renewal rates work differently for different products, so talk with your financial professional to make sure you understand what your renewal rate will be.

Variable Annuities

No doubt you’re looking forward to retiring—less stress and more time to do the things you love. If you want to leave the daily grind behind, but not worry about not having a paycheck, a variable annuity may help. The Details Let’s break down variable annuities so they’re easy to understand. Essentially, you’re setting up an annuity contract that you want to contribute money to and later receive payments or take withdrawals from. Annuity payments can typically either be set up to last for a set period of time or you can select the option of having the income guaranteed for life. Within that one account, you can have several types of investments (stocks, bonds, and money market instruments). Each different type of underlying investment is put into a “subaccount.” When you contribute, you choose how much of your money gets invested in each type of subaccount. You’ll earn money based how well each type of subaccount performs. You can move money around within the variable annuity’s subaccounts. You have the option to receive regular payments from the annuity based on how much it’s worth and how long you select for the payments to last. Why They May Be a Good Idea A variable annuity might make sense if you still want higher growth potential, but you also want the option to have the steady income to rely on. (But your return isn’t guaranteed, and there is a risk of losing money you invested initially.) You can invest money on a regular basis, which can help even out the highs and lows of the market’s performance. Some variable annuities offer options that could lock in the account value. (Restrictions and costs may apply.) You won’t pay tax on the money your annuity earns until you withdraw it. An annuity may also help make things easier for your spouse or children if you die. An annuity doesn’t have to go through probate, so your beneficiaries can access it without having to wait. If you had not started to receive annuity payments (“annuitize”), your beneficiary will get a “death benefit” that usually equals the total value of the annuity, minus any withdrawals. If you had already started to receive payments, the remaining guaranteed payments typically will go directly to your beneficiary. Facts to Consider A variable annuity could be just what you’re looking for if:
  • You want your money to have more potential for growth.
  • You’re concerned about outliving your money.
  • You’re changing jobs or retiring.
  • You want your beneficiaries to have quicker access to your money.
Common Questions Why is tax-deferral important? Tax-deferral means you won’t pay taxes on the money earned by your annuity until you start getting payments. If you’re in a lower income-tax bracket when you start getting payments from your annuity, you’ll pay less marginal income tax on the money you earn. Distributions taken prior to annuitization are generally considered to come from the gain in the contract first. If the contract is tax-qualified, generally all withdrawals are treated as distributions of gain. Withdrawals of gain are taxed as ordinary income and, if taken prior to age 59 ½, may be subject to an additional 10% federal tax penalty.

Immediate Annuities

If annuities sound right for you, but you don’t want to wait years to start receiving payments, an immediate annuity could be exactly what you need. With immediate annuities, your payments will start within a year. The Details This might be the annuity for you if you want your payments to start right away. You can choose payments that start 1 to 12 months after you buy the annuity and you can also choose how often you’ll receive a payment (every 1, 3, 6, or 12 months). You can also choose how long you’ll receive payments: For life For a certain period of time For life, with a certain number of years guaranteed For the rest of your life and your joint beneficiary’s life Why They’re a Good Idea An immediate annuity can balance out your income starting as soon as one month from the day you buy it. Maybe you’re self-employed, and you don’t get a regular paycheck every two weeks. Or maybe you’re already retired, and rely on investment income to cover your living expenses. Those checks might shrink if the market slows down, making it tough to meet your monthly budget. An immediate annuity can smooth out your budget now, and into the future.

Equity-Indexed Annuities

If you find yourself wishing you could invest in the stock market, but you feel nervous about losing money, an indexed annuity could be the middle ground you’re looking for. Indexed annuities let your money grow fast when the stock market is up, and also pay a minimum interest rate when the market is down. The Details The index-linked gain depends on the various indexing features of the Equity-Indexed Annuity, which may include a participation rate and an interest rate cap. 

A participation rate determined how much of the gain in the index will be credited to the annuity. 

An interest rate cap is the maximum rate of interest the annuity can earn. Both of these features could limit full participation in a positive change in the index. The indexed-linked gain will also be affected by the indexing method, which is used to calculate the amount of change, if any, in the relevant index. Additional fees may apply. Review your contract for details. Why They’re a Good Idea There’s no way around it: the stock market has good years and bad years. It’s a natural part of the economic cycle. Indexed annuities let you profit from the market’s ups, while also protecting you during the down times.
  • You’ll have potential for growth, but with less risk.
  • The minimum interest rate serves as a safety net.

Market-Value-Adjusted Annuities

Remember the sage advice to never put all your eggs in one basket? Market-value-adjusted annuities follow that rule to a tee. You can spread your money out over several “guarantee periods” that have different interest rates. The Details Here’s how it works. You can divide your money into several chunks within one annuity. Each portion has its own interest rate that moves up or down based on how your investments do. That way, you can draw your payments from whichever portion has the lowest rate at that time—leaving the rest of your money to grow at the higher rates. Why They’re a Good Idea Annuities are a long-term investment. The idea is to receive payments over the course of many years. The economy will be growing in some of those years, but slumping in others. Those low times are a natural part of the economic cycle, but they can last for years. Market-value-adjusted annuities help you by making your investment more diverse. At any given time, some parts of your annuity could be getting a higher interest rate than other parts. If you take your payment from the part earning less interest, that will leave your other money to keep growing at a faster rate. Because each part has a separate “guarantee period,” you’re more protected from the market’s inevitable ups and downs. Common Questions What is the “guarantee period”? When you get an annuity, you’ll choose how long the minimum interest rate is guaranteed for. That period of time is called the “guarantee period.” After the guarantee period is done, you’ll have a “renewal rate.” Renewal rates work differently for different products, so talk with your financial professional to make sure you understand what your renewal rate will be. What Are the Advantages? Many people choose annuities because: The minimum amount of the income payments is guaranteed. The money earned on the annuity won’t be taxed until they start receiving payments. You can choose when the payments start. Some annuities offer lifetime distributions in the form of a life annuity, so your money never runs out. You can pick the type of annuity that fits your goal and investment style. What Are They Good For? With so many types of annuities available, there’s something for just about everyone, especially: People who want to plan their future income carefully Those who might want to begin receiving retirement income before their Social Security benefits take effect Those who want a lot of guidance with managing their money People who don’t foresee needing to access their money until they start receiving payments from the annu