Author: Rob Sevilla
Agency: Agape Insurance & Financial Group, Tupelo, MS
If you are approaching retirement in Tupelo, you have likely heard about annuities. You might have friends who swear by them as a “personal pension,” while others seem confused by the jargon. At Agape Insurance & Financial Group, we believe that an educated client is a secure client.
This guide to annuities is designed to cut through the noise. We want to help you understand how an annuity works, the different types of annuities available, and whether an annuity is right for your retirement portfolio.
How Does an Annuity Work?
At its core, an annuity is a contract between you and insurance companies. It is designed to transfer the risk of outliving your money from you to the insurance carrier.
When you purchase an annuity, you make a lump-sum payment or a series of payments to the insurance company. In return, the insurer agrees to make payments to you, either immediately or in the future. The safety of these guarantees relies on the claims-paying ability of the issuing insurance company, which is why we only work with highly-rated carriers.
Depending on the annuity type, your money can grow in different ways. An annuity is a financial tool that can serve as a safety net, ensuring a portion of your retirement savings is protected from market volatility.
Different Types of Annuities: Fixed, Indexed, and Variable
There are several types of annuities designed to meet different retirement needs. Understanding the difference between fixed and variable annuities is the first step.
1. Fixed Annuities
Fixed annuities provide a guaranteed interest rate for a specific period, similar to a CD but often with tax advantages. These are ideal for those who want to avoid losing principal. Fixed annuities offer predictability and security.
2. Variable Annuities
Variable annuities are more closely tied to the market. Variable annuities offer the potential for higher growth because your money is invested in sub-accounts that look like mutual funds. However, variable annuities may lose value if the market drops. Because variable annuities fluctuate, you can lose money in the contract value.
Variable annuities are generally for those with a higher risk tolerance. In the case of variable annuities, the fees can be higher, and they require careful management. While variable annuities can be powerful, they aren’t for everyone. Annuities typically offer a death benefit, but variable annuities require you to be comfortable with market ups and downs.
3. Fixed Index Annuities
Fixed index annuities (sometimes called indexed annuities) offer a middle ground. They provide interest based on a market index (like the S&P 500) but offer protection against loss. Indexed annuities allow you to participate in market gains without the risk of market losses.
Deferred Annuities vs. Income Annuities
Beyond how interest is credited, annuities are categorized by when they pay you.
- Deferred Annuities: Deferred annuities allow your money to grow tax-deferred for years before you take income. Deferred annuities provide a way to build up a “nest egg” without paying taxes on the growth until withdrawal. Fixed deferred annuities are popular for this accumulation phase.
- Income Annuities: Also known as immediate annuities (or a single premium immediate annuity), these turn a lump sum into a paycheck right away. Income annuities are designed to generate an income stream immediately. Income annuities may be the best choice if you have already retired and need cash flow now.
Annuities Can Provide Guaranteed Income
The number one fear for many retirees is running out of money. This is where annuities can provide a unique solution. An annuity provides a guaranteed income that you cannot outlive.
By adding a rider or choosing a specific payout option, an annuity provides “longevity insurance.” Annuities also allow you to customize how you receive money. For example, deferred income annuities allow you to set up a paycheck that starts at age 80 or 85, acting as a backstop for a long life.
Annuities typically convert your savings into an income for life. This guaranteed income can supplement Social Security, filling the gap in your budget.
Is an Annuity Right for Your Retirement Portfolio?
Deciding to buy an annuity is a big decision. An annuity may be a good fit if you want tax-deferred growth or lifetime income, but you must consider your liquidity needs.
You should know that annuities are long-term vehicles. If you withdraw funds from an annuity too early (usually before age 59ยฝ), annuities are subject to a 10% IRS penalty, and annuities are taxed as ordinary income.
Annuities can also be funded with pre-tax money (Qualified) or after-tax money (Non-qualified annuity). A non-qualified annuity does not have contribution limits like an IRA, which helps high earners save more.
Annuity Payout Options and Considerations
When you are ready to receive income, you have choices. Annuity payout options include:
- Life Only: Payments for as long as you live.
- Period Certain: Payments for a set number of years.
- Joint Life: Payments continue for your spouse after you pass.
Annuities also offer a death benefit, ensuring that any remaining money goes to your beneficiaries (like a child or spouse) rather than the insurance companies.
Before you select an annuity, ask yourself: Do I need growth (variable annuities), safety (fixed annuities), or income (income annuities)?
Insurance and annuity products are complex. Whether you are looking at registered index-linked annuities or a simple fixed contract, annuities are financial contracts that require professional guidance.
At Agape Insurance, we can help you review your retirement plan. We will look at your retirement accounts and determine if a portion of your retirement should be allocated to an annuity to provide guaranteed stability.
Consider an annuity as part of a holistic plan. Annuities can help you sleep better at night knowing your income in retirement is secure.
Disclaimer: Agape Insurance & Financial Group does not provide tax, legal, or investment advice. Annuity guarantees are backed by the financial strength and claims-paying ability of the issuing insurance company. Variable annuities are subject to market risk and may lose value.