Annuities in Your Retirement Income Planning
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However, due to the economic climate changes, these types of retirement products are becoming more valuable to your retirement income planning than ever before! I am going to give you the good, the bad, and the ugly of annuities in order for you to make a better educated decision on which type of annuity to purchase for your retirement (income) portfolio.
General Annuity Features including their pros/cons
Annuities are offered by an insurance company rather than a brokerage firm.
General annuities have many features that you should be familiar with.
In other words, your account will not be depleted and you will always receive an income off the amount you have put into the annuity and the percentage/dollar you will receive.
So if you live to be 110, you will still be collecting from that annuity.
Because the IRS sees this as a retirement account it will be treated as such.
For example: You invest $100,000 into a 30 year CD earning 3% with a tax bracket of 39%.
However in an annuity earning the same interest you would have earned the following respectfully $120,978; $149,173; $187,063.
Let's also remember that annuities tend to move with the rate of inflation (minimum) therefore not only do you have to pay taxes, you will be losing money if you are not earning the same or more than the CPI (Consumer Price Index= The measurement of inflation).
If you have invested in an annuity and the annuitant (those that will/are receiving the annuity pay) has an untimely death, the assets will be transferred to the beneficiary that was listed on the annuity.
You can easily deposit large sums of money to an annuity without any concerns.
Either way, there is no limit.
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- Systematic Distributions (a fixed or variable amount sent to you on regular intervals)
The IRS views this as a retirement vehicle and as such you cannot withdrawal until the age of 59 ½.
The same goes for other retirement plans so this should NOT be a surprise.
However, be warned that if it's an exchange within a certain time frame (depending on the insurance company) into another insurance company product, fees may be charged.
Surrender charges should be one of the main cons you should keep an eye out for when choosing which annuity for your retirement account.
This really should not be a concern since this is retirement money so you really should not be investing in annuity anyway if you're unsure you will need these funds within 10 years.
Premiums (fees) to participate in an annuity are a big concern and the ranges vary depending on age brackets and company.
25% of the portfolio value.
expenses and is paid yearly at an average of around $30 pr 2%, whichever is LESS.
5% a year on average and just like it sounds, it pays for managing the portfolio.
5- 2% a year.
This is due to the accumulation period (earning more there by having your value increased higher in which you will be receiving higher pay).
Part 2.
They choose an annuity that they do not qualify for or do not understand and things turn soar.
- Fixed/Traditional Annuity: This type of annuity is almost identical to CD's in which you are guaranteed to earn X amount of percentage for a certain amount of time.
In most cases it is by the rate of inflation (Consumer Price index).
- Indexed Annuity: This product is unique in which you are correlated with a particular stock market (in most cases the S&P) and have a guaranteed minimum.
5%.
5%.
So if you have a cap of 10% and the market earns 15% or even 30%, you will only earn 10%.
These rate of returns are based on your chosen options on how it will be measured which can be month- to- month, yearly, point- to- point (depends on the insurance company and/or you), or quarterly.
As long as you have a guaranteed minimum and able to participate in some upside in the markets, the opportunity risk is worth taking for most investors.
A variable annuity correlates with the markets or particular investments within the annuity.
In other words, your principle is NOT protected.
You are taking the same amount of risk so it is not worth the extra fees (all fees mentioned in part 1 apply to this type of annuity indefinitely).
- Immediate Annuity: Also called a "Single- Premium immediate annuities", this is a safe vehicle that pays an income for life after you pay 1 lump sum.
This product is great for those that plan on retiring in less than 6 years.
The simplest way to understand these categories are simply distinguished by the way it is funded with before taxes (qualified) or after taxes (non- qualified).
The major difference for a qualified annuity is:
- Contribute with pre- tax dollars
- Contribute based on "work" earnings
- Yearly contribution limits
- Direct rollover accepted to another qualified plan
- Withdrawal requirements at age 70 ½
Non- qualified plans have none of these.
Part 3.
I will explain some of these common features:
- Indexing Method: The indexing method means the approach used to measure the amount of change, if any, in the index.
- Cap Rate or Cap: Some annuities may put an upper limit, or cap, on the index- linked interest rate.
In the example given above, if the contract has a 6% cap rate, 6%, and not 6.
Not all annuities have a cap rate.
For example, if the calculated change in the index is 9% and the participation rate is 70%, the index- linked interest rate for your annuity will be 6.
3%).
Therefore, the initial participation rate in your annuity will depend on when it is issued by the company.
When that period is over, the company sets a new participation rate for the next period.
- Floor on Equity Index- Linked Interest: The floor is the minimum index- linked interest rate you will earn.
A 0% floor assures that even if the index decreases in value, the index- linked interest that you earn will be zero and not negative.
The index averaging may occur at the beginning, the end, or throughout the entire term of the annuity.
Personal opinion on which annuity is right for you and when to purchase them
An annuity is not just a retirement account but it's a long- term commitment between you and the insurance company.
I am going to say it again, 1 type is NOT build for everyone.
The best age to invest in these products is in your 50's.
I recommend you should max contribution to your employer's retirement account and your IRA before you invest in an annuity.
In most cases, Indexed annuities are great for those under the age of 65.
If you are over the age of 65, you should consider a fixed annuity to avoid volatility.
Immediate annuities are great for those that will retire in less than 6 years.
Variable annuities are only good if you max all your retirement accounts (employers and IRA) and wish to contribute more in a retirement account.
I would rather advice you to invest in a municipal bond ladder portfolio or ETFs (Exchange Traded Funds) and reinvest in the dividends to build a tax- free/deferred portfolio THEN later in your mid- 50's move the assets over to an indexed/fixed annuity that is guaranteed lifetime income.
Your retirement is more important than just trying to gain as much in the stock market.
If your under the age of 40 than you should be in more equity/stocks and take the risk since you have many years of work and making money ahead of you.
This is vital information in analyzing the percentage of your retirement portfolio that needs to be invested in annuities because it is not a question of "if" but how much needs to be in an annuity.
As the economic environment changes, so should your retirement account.
You will lose assets and soon enough you're back on the work force till the day you die.
or is it? The decision will always be yours.
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