The Annuity Income Retirement Guide
What are Income Annuities?
Types of Income Annuities
How Income Annuities Work
Pros and cons of Income Annuities
How to determine which Income Annuity is right for you
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What Are Annuities?
Annuities are insurance contracts that make regular payments to you either immediately (Immediate Annuity) or at some point in the future (Deferred Annuity) depending on the type you purchase. You buy an annuity by making either a single payment or a series of payments. Similarly, your payout may come either as one lump-sum payment or as a series of payments over time.
There are two types of Income Annuities, allowing you to find one that fits your needs. You can also purchase a variety of contract provisions, known as riders, to modify the annuity to further customize it.
What Types Of Income Annuities Are There?
There are three types of income annuities including fixed, immediate and deferred. Here is how they work:
Immediate Annuity Immediate annuities generate income immediately after purchase. Your income provides guaranteed payments soon after you make your initial deposit. The owner can choose to receive guaranteed payments for life or a specific length of time.
Deferred Annuities. Deferred annuities allow your investment to grow tax-deferred until you decide to start receiving income payments at some time in the future. And you choose when you want to start receiving income payments. Once the income is turned on it is contractually guaranteed for the rest of your life. It can also be passed on to a spouse if it is a joint annuity. Deferred annuities may make sense for people looking for additional guaranteed income even when the need is a few years in the future.
Fixed Annuity. An insurance company accepts the investment risk and places money in high quality fixed-rate investments such as bonds. This allows the company to guarantee a fixed interest rate for a certain period of time which is generally from one to 10 years. The interest earned is tax deferred until it is withdrawn.
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Are Annuities Safe?
By and large, annuities are a safe investment. However, it’s important with annuities to purchase them from highly rated, well-established insurance and financial services companies with good reputations. We use Annuities Genius software to remove the guesswork finding the best annuities.
That’s partly because, unlike certificates of deposit, annuities are not insured by the Federal Deposit Insurance Corporation.
However, all states have guaranty associations that insure at least partially against the failure of annuity providers.
The Pros and Cons of Annuities
Remember, there are a few different types of annuities with an almost unlimited amount of combinations you can create, including the riders you can add to them (Guaranteed Life-Time Income, Long-Term Care, Death Benefit, etc.). With that said, there are some common pros and cons to Annuities overall that you should be aware of:
The Pros
Annuities can provide lifetime income at much higher withdrawal rates than traditional retirement accounts without worrying about running out of money.
Income annuities eliminate longevity risk.
Fixed annuities guarantee a rate of return, which translates into a steady income stream.
Income annuities eliminate longevity risk and sequence of returns risk.
The Cons
Some have Fees, Low Cap and Participation Rates.
Limited access to funds.
Net returns on withdrawals are taxed as ordinary income.
Returns of an annuity may not match traditional investment returns.
Why To Consider Indexed Annuities
With an indexed annuity, the company will credit you the return that is calculated by the changes on a certain index, such as the S&P 500, but without actually having your money in the market. It will also guarantee you a minimum return, though these minimums can vary from one company to the next. Some of the benefits of an indexed annuity include:
You can use the funds to build up money on a tax-deferred basis (where you don't pay taxes until you withdraw the money).
You can withdraw up to 10% a year of the original amount you invested without penalty.
You can add a death benefit where, if you die early, the annuity will go to your beneficiary tax-free and avoid probate altogether.
You can also pull out up to 100% of the annuity without penalty if you are forced to go into a nursing home.
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