As an expert in the field of annuities, I encounter these questions and many others on a daily basis. The purpose of this page is to shed light on some of the benefits of annuities in an effort to give you an accurate representation of fixed annuities and to answer some of the basic questions many people have.
Basic Introduction To
Few financial tools have experienced the meteoric rise in popularity as annuities have. In the last 10 years, the utilization of annuities has skyrocketed as more and more aging baby boomers choose these products as stable vehicles to protect their assets and provide reliable income in retirement. If you’re over the age of 50, you’ve surely seen articles, advertisements and educational events promoting these innovative tools. But you probably have some questions: How do annuities protect my money? Are annuities safe? Will I pay taxes on assets inside an annuity? How accessible is my money in an annuity?
Annuities provide many safety nets for retirees. First, the money inside annuities is insured by the issuing company’s underlying investment portfolio. These portfolios are made up of stable, long-term investments like government bonds. Each carrier receives a rating that indicates to consumers how well the insurer is prepared to pay their policy holders on claims. Secondly, even insurance companies buy insurance on their assets: this practice is called re-insurance. Finally because insurance is governed by the state, insurance companies are required to contribute to a state guarantee fund that offers benefits to policy holders in the event the insurance companies were to be unable to pay their policy holders. With these multiple layers of safety in place, annuities are regarded as some of the most stable tools for retirement money. As an added benefit of being an insurance product, annuities offer guarantees to their owners. Fixed annuities offer guarantee of principle to their owners, meaning that the worst return you will receive is 0%. After the market dropped more than 50% twice in the 2000’s the ability to eliminate losses has become an appealing feature that separates annuities from many other financial tools.
If you’ve ever had an IRA or a 401k you’ve had experience with a financial tool that is tax deferred. Tax deferral allows you to avoid paying income taxes on gains inside the account. The only time you will pay taxes on your money is when you make a withdrawal on the account (or when you reach age 70 ½ and are required to take distributions). Every dollar inside an annuity benefits from tax deferral, even if it is savings outside of a qualified account. By utilizing an annuity as part of your retirement strategy many people are able to reduce their tax burden while allowing their assets to grow in a safe vehicle.
Perhaps the greatest benefit of annuities is the ability they have to provide income that lasts for life. In a traditional retirement vehicle like mutual funds, retirees have a balancing act to perform between withdrawing enough income to fund retirement while at the same time preserving enough money to make their account last as long as they will live. Annuities solve this puzzle by offering income guarantees in many types of products. The carrier takes the risk of the account running out of money and guarantees income payments from the policy for the life of the owners. Income payouts vary based on age and product, but no other financial vehicle in the world is able to offer income for life. In the last decade, the number of Americans buying annuities has skyrocketed – this is a direct correlation with the large numbers of baby-boomer now entering retirement. If you are concerned about outliving your income in retirement, an annuity may be the right solution for some of your nest-egg dollars.
Annuities come in many shapes and sizes. Some are designed as income generators with unique features to maximize income. Others are built to manage the risk of other retirement hazards like long-term care. While the exact features vary from product to product, many annuities have features that will double or even triple the income you will receive for a period of time should be become disabled or enter long-term care. It’s important to work with a skilled annuity advisor to find the product that best addresses your needs, but if the high-cost of long-term care is an issue concerning you, there are many annuity products that are tailored to help you manage this risk through retirement.
Many of the criticisms of annuities central around the idea that annuities lock up your money. Annuities are most powerful when given time to do their job, and are best suited for retirees planning to leave their money in an annuity for a period of time. However the term that annuities are meant to be held vary from as little as one year to as long as 16 years. Most annuities allow for a 10% withdrawal from the account each year with no penalties. As the policy remains in force for multiple years, the liquidity in the policy gets more readily available. Most people don’t have plans to spend their nest-egg in as little as 10 years, so even just a 10% withdrawal rate is adequate for many annuity buyers. If liquidity is a concern for you some unique annuities allow you to withdraw all of your principal without penalty with a feature called a return of premium rider. As with every aspect of annuities, working with a reputable and skilled annuity advisor is essential to find the product with the features that are most important to you.
We’ve all heard horror stories of people who did not make good plans for their passing that resulted in their estate entering the probate courts. Probate is a difficult process to navigate in which the state deems who should receive the various assets from the estate. Often times attorneys and government agencies eat up a large portion of the assets that would have otherwise gone to loved ones. While building a solid estate plan should include a will and the services of an attorney, life insurance products and annuities are never subject to this estate process because of the beneficiary features inside the contract. By designating someone as your beneficiary on an annuity or life insurance contract, the assets inside that vehicle are exempt from the probate process even if no will is in place. This is just one feature that can greatly simplify the estate planning process.