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What are annuities and are they appropriate for me?

If you’re reading this page, chances are you are looking for ways to provide stable, lifetime income payments during your retirement years.  Annuities can be a great way to protect a portion of your retirement assets by transferring some of the market risk to an insurance company.

First let’s discuss what is an annuity.  Typically you purchase an annuity (which is an insurance contract) with a lump sum of money and the insurance company agrees to pay you a fixed sum of money each month for the rest of your life.  The benefit of an annuity is that you are shifting some of the risk of running out of money during your lifetime and putting that risk on the insurance companies shoulders as they are “guaranteeing” a certain lifetime payout to you. Now the downside is there is obviously a cost for that protection.  Thus, annuities are typically more expensive than traditional investing models.  Ultimately, you need to decide if the excess fee’s are worth the financial confidence.

Fixed vs Variable Annuities: 

Fixed annuities feature fixed interest rate and/or fixed income payouts that can range from a period of time to an entire lifetime depending on the contract.  Many fixed annuities offer you the option to either take a fixed rate of return adjusted annually or you can tie your returns to an index, like the S&P 500…  The advantage to many fixed annuities are that unlike an traditional investment, the fixed annuity typically guarantees no loss of principle due to market ups and downs.  Also, fixed annuities are typically low cost or no cost depending on the contract and features you choose. One of the major downsides to a fixed annuity is that you don’t receive any dividends from the index, which historically has contributed to a significant percentage of “total return” for an investment portfolio. Also, many fixed annuities come with long surrender periods which may limit when and how much of your money you can access.  It’s important to understand all the features of the annuity before you make your decision.

Variable annuities on the other hand are an insurance contract that allows you to invest in a variety of mutual funds as you may normally do, and then they typically provide various living and/or death benefits depending on the contract.  Many clients choose these types of investment vehicles when they are looking to provide lifetime income payments for themselves and a spouse.  Fees for variable annuities are typically higher than a fixed annuity but typically provide for higher upside performance due to the fact that you are invested in a variety of mutual funds.  These investments also partake in any interest or dividends received from the underlying holdings.

Lifetime vs Fixed Period:

As previously stated, some annuities guarantee lifetime payments to you (and your spouse) while others are designed to pay you more for a shorter period of time (say 10 or 20 years).  If you take the fixed period option, in most cases, if you pass before the time period is up, those payments would continue to your beneficiary until that time has elapsed.  For lifetime income payments, the payments continue for your lifetime (and in some cases that of your spouse) and any remaining principle value in the annuity is paid to your designated beneficiary.

Single Premium vs Multiple Premium:

A single premium annuity means you make a lump sum purchase of the annuity contract and don’t add any more premium (money) to the policy.  A multiple premium policy means you add to the policy over time… Either is fine, which you choose just depends on your personal financial situation.

Summary

An annuity can be a great way to provide steady income to your family during your retirement years, but you need to be careful and evaluate all of the features and expenses that the contract entails before signing.  We will work with you to evaluate whether an annuity is an appropriate investment vehicle for your overall financial well-being and help you build a game-plan for generating retirement income.

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Although it is possible to have guaranteed income for life with a fixed annuity, there is no assurance that this income will keep up with inflation.  There is a surrender charge imposed generally during the first 5 to 7 years or during the rate guarantee period.

The guarantee of an annuity is backed by the claims paying ability of the issuing insurance company.

Indexed annuities are insurance contracts that, depending on the contract, may offer a guaranteed annual interest rate and some participation growth, if any, of a stock market index.  Such contracts have substantial variation in terms, costs of guarantees and features and may cap participation or returns in significant ways.  Any guarantees offered are backed by the financial strength of the insurance company, not an ouside entity.  Investors are cautioned to carefully review an indexed annuity for its features, costs, risks and how the variables are calculated.

There is a surrender charge imposed generally during the first 5 to 7 years that you own a variable annity contract.  Withdrawals prior to age 59 1/2 may result in a 10% IRS tax penalty, in addition to any ordinary income tax.  The guarantee of the annuity is backed by the financial strength of the underlying insurance company.  Investment sub-account values will fluctuate with changes in market conditions.  Investors should consider the investment objectives, risks and charges and expenses of the variable annuity carefully before investing.  An investement ina  variable annuity involves investment risk, including the possible loss of principal.  Variable annuities are designed for long-term investing. The contract, when redeemed, may be worth more or less that the total amount invested.  Variable annuities are subject to insurance-related charges including mortality and expense charges, administrative fees, and the expenses associated with tthe underlying sub-accounts.  The prospectus, which can be obtained directly from the company or from your financial professional, should be read carefully before investing or sending money.