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ANNUITIES
What is an Annuity?
An annuity is a contract between you and an insurance company that is designed to help you meet retirement and other long-range goals. Annuities are funded by making a lump-sum payment or series of payments. In return, the insurer agrees to make periodic payments to you beginning immediately or at some future date.
Annuities offer Tax-Deferred Growth
Annuities typically offer tax-deferred growth of earnings and may include a death benefit that will pay your beneficiary a specified minimum amount, such as your total purchase payments. While tax is deferred on earnings growth, when withdrawals are taken from the annuity, gains are taxed as ordinary income rates, and not capital gains rates. If you withdraw your money early from an annuity, you may pay surrender charges to the insurance company, as well as tax penalties. Please contact us to discuss your particular circumstances.
3 Types of Annuities: Fixed, Indexed, and Variable
In a Fixed annuity, the insurance company agrees to pay you no less than a specified rate of interest during the time that your account is growing. The insurance company also agrees that the periodic payments will be a specified amount per dollar in your account. These periodic payments may last for a definite period, such as 20 years, or an indefinite period, such as your lifetime or the lifetime of you and your spouse.
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A Fixed Indexed Annuity (FIA) is a financial instrument, offered by insurance companies, designed to meet long-term needs for retirement income, and they provide guarantees against the loss of principal and credited interest, and offer the reassurance of a death benefit for your beneficiaries. FIA’s have become very popular over the past two decades for several reasons. A FIA affords contract holders protection from market losses and growth potential based on a market index (like the S&P 500) without the risk of actually participating in the market. To help balance the value of the downside protection, the insurance company imposes an upper limit, or “cap,” on the amount of interest you can earn in a given period.
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FIA’s also offer you an opportunity to allocate some or all of your money to a fixed rate strategy that earns a guaranteed interest rate. This rate will vary greatly from company to company.
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Many FIA’s also offer Income Riders, generally available at an additional cost, that afford the contract holder the ability to create a predictable stream of income they can never outlive. This can be a good feature if you plan on taking income from the account to supplement your retirement income. Prior to purchasing a FIA contract with this feature (and paying a fee) we recommend you discuss your retirement income needs with your financial professional.
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It’s important to remember, in a FIA, you cannot lose money based on equity market declines. However, early withdrawals may result in loss of principal and credited interest due to surrender charges. A key feature of this type of product is protection of principle. In her book, The Courage to Be Rich (page 306), Suze Orman asked and answered this question…”Who Should Purchase an Indexed Annuity?”
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“Anyone who wants to invest in the market but is afraid of losing money.”
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A Variable Annuity (VA) is a security regulated by the Securities and Exchange Commission (SEC). In a VA, you can choose to invest your purchase payments from among a range of different investment options, typically mutual funds. The rate of return on your purchase payments, and the amount of the periodic payments you eventually receive, will vary depending on the performance of the investment options you have selected.
Economic Uncertainty: Protect Retirement Assets
A common concern these days for retirees and pre-retirees is an uneasiness regarding how current world events will affect equity markets and their retirement assets. In these trying social and economic times retirees have every reason to be concerned.
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Over the last twenty years we’ve witnessed periods of economic uncertainty; the dot-com bubble and 9/11 (2000-2002) and the Sub-Prime Mortgage Crisis (2007-2009 “Great Recession”). One of the biggest threats to the stability of retirement assets during periods of economic uncertainty is know as Sequence of Returns Risk. Understanding how the Sequence of Returns Risk affects your retirement account value and its ability to generate retirement income is vital when developing your retirement income strategy. Our goal is to help you mitigate your retirement nest egg’s exposure to Sequence of Returns Risk.
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To learn more about Sequence of Returns Risk, click here for a short video.
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For the past two decades Legacy Planning Services, LLC has been working exclusively with retirees and pre-retirees, providing prudent, proactive solutions when they need it most. If you would like to learn more about how Legacy Planning Services, LLC can help safeguard your legacy, Click Here.
Please note that Legacy Planning Services, LLC and its representatives do not transact securities or provide securities advice.
Guarantees are backed by the financial strength and claims-paying ability of the issuing insurance company.