What is an Annuity?
Most people have heard the term 'annuity', but do you know what an annuity is? What about how they work? Did you know that an annuity can be an integral component of your financial strategy to carry you through retirement? Let's start with the beginning, what is an annuity? To put it simply; an annuity is an insurance product that you fund, and once the time established upon opening the annuity has elapsed you will begin to receive income in the form of regular payments. How much this income will be is determined by the type of annuity chosen when it was established, and the amount of the contributions that were deposited- whether the deposit was one large lump sum or smaller amounts deposited over an extended period. An annuity is often a popular choice for investors who wish to see a reliable and steady income stream in retirement. According to the Government Accountability Office, annuities can be an important piece of your overall retirement plan. At AtmosLife we offer access to a variety of annuity structures, ensuring that we can help you achieve your goals with the best option available. As annuities are a specialized product and require in-depth analysis, this will require a one-on-one appointment with your licensed professional.
An annuity begins with your initial investment. At a predetermined point in time, established upon inception, the financial institution managing your annuity will begin to make payments to you according to the schedule established upon set up. The income received from an annuity will typically be paid on an annual, quarterly, or monthy basis, or even as a single, lump sum. The size of the payments you’ll receive from the annuity is based on many different factors, including the length of your payment period and the amount of funds invested into the annuity.
You might choose to receive payments over the course of the rest of your life, or for a set period of years. With the wide variety of options available, you can choose an annuity that is tailored to your specific needs and goals.
Basics of how an Annuity works
learn more
Potential
Advantages
of an Annuity
There are many different advantages to using an annuity that go beyond planning for your retirement. If you have maxed out your contributions to other accounts that provide tax free retirement growth, such as an IRA or a 401(k), an annuity provides an additional option to build a nest egg for your future. As there is no maximum annual contribution limit with an annuity, annuities can stand apart from other tax deferred accounts like an IRA or a 401(k). An additional benefit of investing in an annuity is that they do not need to be included on the free application for federal student aid (FAFSA) submitted by parents when applying for financial assistance with their child’s college education.
- • Annuities provide lower risks than traditional investments, providing income you can rely on in the future.
- • Annuities do not need to be included on student financial aid applications.
- • Annuities give you the opportunity to save for your retirement- even if you've already maxed out other options.
What You Should Know
About Ages
and Annuities
The investment earnings within an annuity compound and accumulate; remaining untouched from local, state, or federal income taxes until you begin withdrawing funds. The primary goal of most people choosing to invest in an annuity is to save for retirement, and funds are available without penalty once you reach age 59 and a half. Withdrawals from your annuity prior to age 59 1/2 are taxed as ordinary income and could be subject to a 10% federal tax as well.
Book your ConsultationSurrender Charges
learn moreYou should also bear in mind that the financial institution managing your annuity is likely to have their own surrender charges to be imposed if funds are withdrawn early, especially during the early period of the contract. This is why you should consider an annuity as a long-term investment strategy as opposed to an option with short-term withdrawal potential. While the funds in your annuity are accesible in the event of a serious need, early withdrawal can come with heavy penalties and should be considered carefully.
There is substantial growth opportunity with tax deferred annuities in comparison to other taxable investments. When looking at investment plans like a 401(k) or an IRA, you have much more control over the annuity income.
If you are adverse to risk, there is the option to choose an annuity with multiple investment options. While the majority of financial experts working with individuals in their 30s and 40s will point long-term investment strategies towards investing in stocks, these investments carry a high level of risk. Diversifying your investments by choosing the annuity that is right for you is one way you can mitigate risk and ensure a safe, long term, income stream to carry you through your retirement.
How Deferring Taxes
Can Build Value in
Your Annuity
Fixed or Variable?
learn moreTwo of the most common annuity types are fixed and variable. While a fixed annuity gives the guarantee of the principal amount plus a minimum interest rate, a variable annuity’s value depends on the performance of the associated investment portfolio. Interest credited to a fixed annuity account is based on the company’s declared rates, and these rates only change on an annual basis. A variable annuity, however, could fluctuate in value daily based on the portfolio’s investment performance.
Deferred vs Immediate Annuities
As their names suggest, there are some key differences between deferred and immediate annuities, which we'll review here to increase your knowledge and help you to determine which might be most appropriate for you and your particular circumstances. An immediate annuity starts the payout to the owner very shortly after the premium has been paid in. A single premium is used to purchase an immediate annuity, such as a lump sum deposit of $100,000. and you will know upfront what to expect to receive in payments from the beginning. In an immediate annuity assets will not accumulate on a tax-deferred basis, they are disbursed based on a predetermined formula, and you can expect to receive a fixed amount for a fixed period- either a predetermined number of years or over the course of your life. Typically an immediate annuity contract will be irrevocable, so the contract cannot be changed once its been executed so ensure you've reviewed all of the conditions with your financial professional before signing. Alternatively, a deferred annuity begins paying out at a predetermined point in the future. This means that the amount invested in the annuity can accumulate over time, and the premiums can be paid in either as one lump sum or you can make smaller deposits periodically. After you pass through any potential surrender period on the annuity, you have the option to exchange or surrender it without extra charges. A deferred annuity, therefore, has more flexibility based on what has been deposited and the performance of the investment options you've chosen upon entering into the contract. Additionally, the assets within a deferred annuity do accumulate tax-deferred and distributions are made first from interest or gains earned and subject to taxation at ordinary income rates.
Returns of Annuities
There is a great deal of variation when it comes to the returns that an annuity may earn. In many cases comparing an annuity with more traditional investment vehicles indicates that the growth potential with an annuity can be much lower. However, this direct comparison fails to take into consideration the safety and stability associated with annuities. Advantage Compendium (published by the NAFA, National Association for Fixed Annuities) evaluated fixed indexed annuity average returns and determined that the average annual return for all fixed indexed annuities included in the study hovered around 3.27%. The range of return stretched from 5.5% average (on an annualized basis) to 1.2% average. As you can see, this is significantly higher than most in comparison with another investment vehicle such as a CD. When used appropriately, an annuity can be an important part of your investment portfolio. You should carefully evaluate your needs both in the short-term and long-term before committing to an annuity. As part of a diversified portfolio, an annuity provides stability, strength, and safety while allowing you to set money aside towards your retirement plan. There are pros and cons to investing in an annuity, as with all investment types, but fully exploring your options and researching the different annuity options to determine the most appropriate for you can be extremely helpful and will provide a solid foundation of knowledge for when you consult with your financial professional. Many people identify significantly with the potential returns of an annuity because of the safety and strength of the products on the market today. Planning ahead now can help you enjoy a better retirement when you are knowledgeable about annuities.
Book your ConsultationWhat Questions Should I ask
About an Annuity?
Annuities are not for everyone, but they might play a valuable role in your retirement plan — as long as you take the time to learn everything you can about your options, ask the right questions, and choose the annuity that is most appropriate for your needs.
Annuities can be complicated, and the choice you make can have lasting implications, so be sure to ask your financial professional for clarification about anything that is still unclear before you commit to investing with an annuity.
Buying an annuity can often be a smart choice when planning for and entering retirement. They provide a vital guaranteed income stream - as long as the insurance company managing the annuity remains solvent, as top-rated insurers are likely to do. Still, an annuity is far from a simple investment, and it’s worth reading up on them before buying one.
Here are some questions to ask as you consider your options and whether an annuity is right for you:
To determine the right type of annuity, assess your financial goals, risk tolerance, and income needs. Consult with a financial advisor to explore options such as fixed, variable, or indexed annuities, and consider factors like withdrawal flexibility and death benefits. A personalized analysis will help you make an informed choice tailored to your circumstances.
The best channel for purchasing an annuity depends on your personal preferences and financial needs. Evaluate options such as direct insurance companies, financial advisors, or online platforms while comparing costs, service, and product availability. Ensure you understand the fees and commissions associated with each channel to make an optimal decision.
To ensure financial security, check the insurer's ratings from independent agencies like A.M.Best, Moody's, or Standard and Poor's. A high rating indicates strong financial stability and the ability to meet future obligations. It's wise to choose an insurer with a solid reputation to safeguard your investment.
Annuity cost can vary based on type, features, and the insurer. Common costs include premiums, administrative fees, and surrender charges; be aware that variable annuities may have additional investment management fees. Review the contract and ask for a breakdown of all potential costs before making a purchase.
Essential features to consider in an annuity include income options, withdrawal flexibility, beneficiary designations, and any riders that provide added benefits; such as guaranteed income or long-term care coverage. Evaluate how these features align with your financial goals and risk tolerance. Consult with a financial advisor to tailor your annuity to your specific needs.
Worst-case scenarios with annuities may include the issuer becoming insolvent, market volatility affecting variable annuities, or unexpected fees reducing your returns. Additionally, if you withdraw funds prematurely, you may incur surrender charges and tax penalties. It's crucial to fully understand the terms and risks associated with your annuity contract.
Annuities are not covered by federal insurance like FDIC for bank accounts. However, they may have protections through state guaranty associations, which provide a safety net for policyholders up to certain limits. It is important to research the specific protections available in your state regarding annuity providers.