Not affiliated with The United States Office of Personnel Management or any government agency

Not affiliated with The United States Office of Personnel Management or any government agency

Don Fletcher: Maximize Your Retirement Income

The Basics of Income Annuities: What You Need to Know Before You Purchase

[vc_row][vc_column width=”2/3″ el_class=”section section1″][vc_column_text]While they certainly are valuable, annuities can be complicated. Before you consider one, it’s best to familiarize yourself with the fundamentals.  

Quickly gaining in popularity amongst older investors, annuities can help ease the concerns that retirees have over maintaining a stable income. Each year, more and more retirees report that among their top concerns is running out of money. The right type of annuity can provide a reliable income source after the luxury of a steady paycheck ceases. 

The American College of Financial Services researchers Wade Pfau and Michael Finke recently conducted a survey that revealed that adding income annuity can increase the chances of a retiree’s portfolio lasting until they reach the age of 95. The study was funded by Principal, an insurance and financial management company, and found that utilizing both investments and annuities can improve the legacy value of assets long term. 

The basics of an income annuity are pretty simple: Through a contract between insurance companies and individuals, investors put money into a contract that guaranteed how and when they’ll earn back their money. However, that’s where the simplicity with annuities ends. There are many types of annuities, each with their own set of complex riders, rules, fees, and complications. The guarantee offered by the contract is up to the claims-paying ability of the insurance company. 

It’s wise to be a little skeptical when approaching any investment, and annuities are no exception. Annuities are not necessarily a smart addition to every retirement plan, but it can pay off for those who do their research, make the purchase through a reputable company, and understand how the product will affect their current portfolio. 

If you’re interested in the possible benefits of an annuity, here are a few basics: 

The Five Main Types of Annuities

Fixed annuities: Those who purchase a fixed annuity receive the benefit of a fixed interest rate for a set period. Similar to a certification of deposit, the rate won’t increase when the market is good, but the investor can earn the stated interest rate. The investment also can’t lose money when the market is down or through a decrease in actual dollar value. 

Variable annuities: These types of annuities are directly linked to the stock market or any other investments the owner chooses. Gains and losses are based on the performance of those accounts, so unlike a fixed annuity, this annuity can vary depending on the stock market. If the fund is performing well, then the annuity value will increase, and the owner could receive a larger payout. Even if the fund isn’t doing well, the contract’s guaranteed rate may still offer a stable long-term income.  

Fixed indexed annuities: Combining features of both the fixed and variable annuities, a fixed indexed annuity offers a guaranteed minimum rate of return so investors can protect their Principal. Fixed indexed annuities are also connected to an underlying index, such as the S&P 500, so if the stock market is healthy, there is the capacity to earn more. It’s important to read the fine print on these types of plans because the upside is subject to participation rates, spreads, and caps.  

Deferred annuities: With this type of annuity, the investor makes a payment upfront, but the insurance company delays the payout of income until the investor reaches a specific age. The benefit is such that the payouts can be higher than with intermediate annuities, mainly if the payout start date is far in the future, but the risk is that the investor may not reach the age in which they receive benefits. 

Intermediate annuities: An intermediate annuity allows the investor to make a lump-sum payment to the insurance company to start immediately collecting income payments, usually within 30 days. These types of annuities can be set up to pay out either for a fixed period or over one’s lifetime. Because the payouts are typically sensitive to interest-rates, this could affect the overall income provided by the annuity. [/vc_column_text][/vc_column][vc_column width=”1/3″][vc_single_image image=”37096″ img_size=”292×285″ style=”vc_box_shadow”][/vc_column][/vc_row]

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