The Hyers & Associates team works with annuities of all kinds and can help you understand how they are used in conjunction with your retirement – or as an investment opportunity. Many people search for safe and reliable ways to manage their money while retired, and an annuity is an option you should consider. Understanding their purposes will help you choose the best way to manage your money and enjoy a stable retirement.
What is an Annuity Policy?
An annuity is a contract with an insurance company. The contractual agreement is that you will deposit an agreed upon amount of money with an insurance company, and in return, they will provide a known rate of return for growth, income or both.
If you want income, you can choose to receive your payments on a yearly, semi-annual, quarterly or monthly basis. Alternatively, you can defer your income for a later time if you wish to grow your principal for future needs. Some consumers withdrawal only their interest, while other receive both interest and principal. Annuities offer several ways to establish a present or future income stream.
These accounts accept both pre and post-tax funds. Policies are referred to as qualified and non-qualified annuities, respectively. You can deposit IRA, 401(k), 403(b) or extra funds at the bank into an annuity account.
Types of Annuities
There are two types of annuities that can be purchased: immediate or tax-deferred annuity accounts. An immediate annuity begins regular payments shortly after the investment has been made. A deferred annuity will not start payments until a later date chosen by the buyer. Some investors defer payments for a lifetime and enjoy the tax-deferred growth these contracts provide. There is a lot of flexibility with annuity insurance policies.
An annuity can be either fixed, indexed, or variable. A fixed annuity offers known, fixed interest that compounds on a daily basis (if deferred). A variable annuity invests in mutuals funds and can go up or down with the market. An indexed annuity pays varying amounts of interest based on how chosen indexes perform, but never loses value.
The Pros of Annuities
- A great way to plan for lifetime income
- Better interest rates than CD’s or other fixed-income investments
- Growth can accumulate tax-deferred and reduce your taxable income
- With the flexibility of a deferred annuity, you can determine your future income stream
- You can provide lifetime payouts to just yourself – or also a spouse if desired
The Cons of Annuities
- Unplanned early withdrawals can decrease future payouts
- Large early withdrawals may also incur surrender charges
- Some payouts are fixed and don’t account for inflation
- Long-term accounts may miss out on future rate increases
Is an Annuity the Right Thing for me?
If you are in a high-income tax bracket and have maxed out other investment opportunities, an annuity may make good sense. You need to be willing to invest your money for a set term – usually 2-10 years. Before choosing an annuity, be sure you ask questions and make sure you understand the contract before agreeing to it.
If you need to withdraw your money early, surrender charges can apply. Most annuities offer the accumulated interest and 10% or the principal each year with no surrender penalties. If you’re choosing an immediate annuity with guaranteed payments, then there would be no surrender fees. Be sure to ask your agent about all of your withdrawal options.
What Happens if I Die?
It depends on your contract, but with almost all annuities your entire account value pays out to your named beneficiaries. There is a lot of misinformation about annuity policies; please know that the insurance company does not keep your accumulated funds at passing.
Typically your beneficiaries have several options available to them. A spouse can usually keep the contract inforce or surrender the contract and reinvest the account value somewhere else. Children and other named beneficiaries will usually need to surrender the contract, but can choose to receive payouts over 5 years to defer any accumulated income taxes.
That being said, there is one type of contract the ceases payments after the owner dies. They are called life only annuities with no period certain. We don’t see these purchased very often, but they make sense in some very specific cases. Someone might purchase this type of contract to maximize lifetime income, but s/he would be very aware that payments would cease upon passing.
Call Us With Your Questions
If you are considering buying an annuity and have questions, the Hyers and Associates team works with annuities everyday. We are available to answer any questions or concerns you might have. There are a lot of things to consider, and we’re here to help make the process easier, so contact us today!