Investing In Annuities

One of the most effective ways to build your wealth for retirement is by investing in annuities. They give payments on future dates, provide for beneficiaries in the event of an untimely death, and do not charge taxes on their income until they are withdrawn. An annuity is among the investment products manifested by a contract between you and an insurance company. The product is designed to meet your long-term financial goals. For purposes of specificity, we will speak about using annuities for retirement. You either make a lump-sum or a series of payments, while the insurer agrees to make periodic payments at some future date or beginning immediately. The income from annuities may be doled out in the future in a monthly, quarterly, annual or lump sum basis. Aside from insurance companies, banks as well as mutual fund and brokerage firms sell annuities.

With any type of investment comes a considerable amount of risk. When you have enough knowledge on how to go about building your retirement fund thorough annuities, you will find yourself in the future enjoying the benefits. Among the advantages of investing in annuities is that you have the opportunity to place a larger amount of cash and defer paying taxes. This is especially helpful for those who feel they need to catch up and are nearing retirement age. Next, the money you invest compounds year after year without taxes. Third, as mentioned earlier, you have the option for a lump sum payment; or, just like what most future retirees do, you can set up the payments for the rest of your life.

A disadvantage with investing in annuities can be the hidden fees involved since they are great moneymakers for brokerage firms. Many agents enjoy as much as 10% in commission fees. Should you decide to pull out your money soon, surrender charges can be as high as 20% on the first year. Annual fees, such as in variable annuities, also tend to be high.

So here’s a word of advice. When investing on annuities, prepare yourself to make large payments today, give it time to grow, and if possible, begin withdrawals only on retirement age.

Types of Annuities

1. Fixed Index Annuities

Now the current flavor when it comes to retirement planning, FIA’s were formerly referred to as equity indexed annuities. In a survey by the Insured Retirement Institute (IRI), FIA suppliers reported that their sales are growing significantly by almost 40% as of July 2015. Fixed Index Annuities provide exposure to one of the major stock indices such as the S&P 500 while the return of your principal investments is guaranteed. The lifetime income benefits they provide are what make them similar to variable annuities. With the persistent low interest rates other products provide, consumers are flocking to FIA’s due to their guaranteed lifetime income benefits, upside potentials, and principal investment protection.

2. Multi-year guarantee annuities

A multi-year guarantee annuity (MYGA) is one in which an insurance company guarantees that your investment will earn specific rate of compound interest with a period equivalent to the length of time that surrender charges last. They are often called CD-type annuities or tax-deferred CDs (certificate of deposit). They are more predictable and transparent because you know the interest rate that your money will earn for a specific period. There is no way that the interest rate will go down after a year. MYGA’s have surrender periods from three to 10 years.

Say for example, in 10 years you want to buy a house that costs X amount after retirement. To achieve this, you only have to work with your financial advisor on assessing how much money you should invest today for an annuity with a specific interest rate that will eventually allow your money to accumulate into the future amount of that house. That’s how plain and simple MYGA’s are. They are especially ideal for those with ages already nearing retirement.

Some MYGA’s also allow for early withdrawals in the event of emergencies. This becomes very useful during times of nursing home confinement or serious illness diagnosis. In the vent of your untimely death, your beneficiaries may withdraw the full account value even before maturity without any surrender charges.

3. Variable Annuities

Of total annuity sales, about 48% is comprised of variable annuities with guaranteed lifetime income according to the IRI survey. Although consumer behavior is showing a rapid increase in fixed index annuity sales, variable annuities still dominate the market. They allow for tax-deferred savings for numerous accounts, as well as a variety of death benefit options to protect the insurable interests of heirs. The gains you may or may not enjoy from a variable annuity product will be based on the performance of the mutual fund-like accounts to which your premiums were invested, whereas FIA’s offer guaranteed principal protection. The investment strategies for these accounts range from conservative to aggressive so it is necessary that you understand the implications that come with investing on variable annuities.  Variable annuities have sub-accounts that are primarily invested in mutual funds.  If you need to learn more about mutual funds, CLICK HERE.

4. Single Premium Immediate Annuities

When you want a guaranteed income stream after retirement on a monthly, quarterly, semiannual or annual basis, annuities can create a bridge to your Social Security insurance against outliving your cash. This is ideal for anyone who wants cash right away after retirement. Those who have never had the opportunity of investing in annuities at an earlier point in their lives will have a chance to pay lump sum on a SPIA and enjoy receiving the benefits after at least a month. The insurance company will make a promise to make regular payments to you or a dependent for your chosen length of time, usually for the remainder of your life. The annuity may be funded by cash through certificates of deposit, exchanging monies, 401k or IRA account, or proceeds from the sale of stocks, bonds, property or business.

Those who invest on SPIA’s may choose from the following basic payment options:

• Payments for life, or while you are still alive
• Payments for two lives, where benefits are given until the annuitant’s or survivor’s death
• Payments for a specified period, from five to 30 years regardless of annuitant’s death
• Payments for life or for two lives with a specified period

For a sound financial advice in retirement planning, you need the expertise of knowledgeable professionals. To make sound decisions on which annuity best meets your age, investment appetite, monetary goals, and retirement plans, East Coast Tax and Financial Planning is here to help. You can jump on our calendar for a consultation and we’ll be happy to help.