For many Americans, the uncertainty and lack of financial stability over the last year has prompted a second look at their retirement plans. Annuities have made their way to the forefront of these conversations due to their ability to help generate consistent income in retirement. Navigating the many types of annuities that are out there can be challenging, so let’s break down what they are, who can benefit from them, and when folks should consider implementing them as a part of their retirement strategy.
What Is an Annuity?
An annuity is a contract between an individual and an insurance company where the individual gives the company a sum of money (and/or contributes over time), and in return is promised a periodic payout for a stated length of time or their lifetime. Some annuities enable you to invest in the market (variable), while others do not (fixed). Certain variable annuity contracts provide protections against market downfalls with guaranteed step ups (minimum rate of return) while leaving the potential for additional growth. There is no legal limit to the amount you can contribute to an annuity, and contributions are not tax deductible. Taxes on any growth are deferred until you begin to take payments from your annuity, at which point you will pay ordinary income taxes on gains on a last in, first out basis. As is true for many retirement vehicles, a 10% penalty is assessed if you withdraw earnings before age 59 ½.
What Types of Annuities Are Available?
There are two types of annuities – fixed and variable – both of which can receive either immediate or deferred payments. With a fixed annuity, the insurance company guarantees a set interest rate of return on your contribution for a specific amount of time. Variable annuities allow you to invest your contribution in a variety of investments, giving your dollars the opportunity grow with the market. When it comes time to receive payments from your annuity, an immediate annuity allows for payments to begin either directly following the annuity purchase or to be postponed as late as 12 months after the fact. Payments under a deferred income annuity are delayed and can begin at a future time of your choosing.
What’s Your Why for Buying an Annuity?
Are you concerned that the other guaranteed income streams in your retirement plan such as your pension and/or social security benefit will not be sufficient to cover your lifestyle expenses in retirement? While an annuity should not be the sole strategy for your retirement plan, it should be a part of your portfolio. Not only can it provide a guaranteed income stream for your future but, in some cases, it can also protect against market volatility that weighs on your portfolio.
What’s Your Retirement Schedule Look Like?
While products like life insurance protect against dying too soon, annuities are a long-term retirement vehicle designed to protect against outliving your portfolio. After consulting with a financial professional, some Americans take portions of their employer-sponsored retirement plans and convert it into an annuity either at or 5-10 years prior to retirement. Deferred annuities allow you to delay taking income until sometime in the future, though it is important to consider carefully if you might need those funds before the age of 59 ½. If you are on the edge or already in retirement, an immediate annuity can begin paying income shortly after purchase.
What’s the State (Present and Future) of Your Retirement Savings?
When our working days are through, we would ideally like our retirement strategy to be comprised of three core “buckets.” The first consists of our guaranteed income streams such as social security benefits, pensions, and annuities. Since annuities do carry penalties for early withdrawal of funds, it is important to have a second bucket that serves as an accessible cash reserve to cover emergencies. Once the essentials are covered (guaranteed income) and you have free liquidity (cash reserve) for when life changes its mind or a great opportunity comes along, the bulk of your assets will be in the third bucket – invested for long term growth in a way that can produce variable income. With all three buckets activated, you can be more tax efficient, take less risk, have access to cash when needed, and produce more income.
Which Type of Annuity Should You Consider?
Before making any decision, do your homework. Consider carefully what your current circumstances are and what you plan or anticipate for the future.
If you would like to discuss annuities or your overall financial portfolio, click or tap to schedule time with Olivia.
Olivia Allen is a Registered Representative and Financial Advisor of Park Avenue Securities LLC (PAS). OSJ:1040 BROAD STREET SUITE 202 SHREWSBURY, NJ 07702, ph# 848-456-3060. Securities products and advisory services offered through PAS, member FINRA, SIPC. Financial Representative of The Guardian Life Insurance Company of America® (Guardian), New York, NY. PAS is a wholly owned subsidiary of Guardian. International Planning Alliance, LLC is not an affiliate or subsidiary of PAS or Guardian. Guardian, its subsidiaries, agents, and employees do not provide tax, legal, or accounting advice. Consult your tax, legal, or accounting professional regarding your individual situation.
Annuities are long term investment vehicles designed to help investors save for retirement and involve certain contract limitations, fees, expenses and risks, including possible loss of the principal amount invested. The investment return and principal value may fluctuate so that the investment, when redeemed, may be worth more or less than original cost. As with many investments, there are fees, expenses and risks associated with these contracts. All guarantees including the death benefit payments are dependent upon the claims paying ability of the issuing company and do not apply to the investment performance of the underlying funds in the variable annuity. Assets in the underlying funds are subject to market risks and may fluctuate in value.
2021-127011 Exp 09/23