There are a number of annuities products available to purchase on the market today. It can be difficult to understand the differences and which one might work best for your situation. An annuity may not be what is best for you either. The biggest mistake we see with annuities is that retirees will purchase them for the wrong purpose. They can be quite confusing, which is why many people make blanket statements about annuities and how they are the worst thing for you. We believe there is no such thing as a bad tool, it is just a matter of how it is used. Hopefully this will give you a better idea of how and when these tools may be right for you.
If you want help determining what might be a good fit for you, set up a time to sit down with us by calling 952-657-7470 or emailing firstname.lastname@example.org.
An immediate annuity involves you making a lump-sum investment to an insurance company. In exchange, you start receiving payments from the insurance company on a regular basis beginning immediately. There are different options as far as how long the payments will last. You can arrange to have them for the rest of your life, for a fixed time period, or for as long as you and your beneficiary are still living. You can avoid market risk with an immediate annuity, but you essentially lose access to your investment and have to live off of the payments. This could become difficult should an emergency arise. Immediate annuities are designed best to give the most income over your lifetime, but won’t leave anything to your beneficiaries.
You have the option to either make a lump-sum investment to an insurance company or you may be able to make a series of investments into a fixed annuity. These investments will pay a guaranteed rate of interest for a set time period. They share some similarities with Certificates of Deposit (CDs): the principal and interest are guaranteed, and you can face a penalty for early withdrawal. However, depending on the product, you maybe be able to take 10% of your premium out each year without any penalty. Fixed annuities are invested in high-grade corporate bonds and government securities so you can avoid market risk. Typically, these are best used to get a better interest rate than one would find in a Certificate of Deposit at the bank.
A variable annuity is similar to a fixed annuity in the aspect that you have the option to make a lump-sum investment or a series of investments to an insurance company. However, instead of earning a fixed interest rate, variable annuities are invested in mutual funds. Mutual funds are professionally managed funds that can invest in stocks, bonds, money markets, or a combination of the three. Some variable annuities offer withdrawal benefits that allow you to receive lifetime income payments for an additional fee. Variable annuities offer a great growth vehicle while still enjoying the tax deferral benefit. The disadvantage to variable annuities is that they still have downside risk where you can lose value and they can be costlier than other annuities as fees are attached to almost everything.
Fixed Index Annuities/Equity Indexed Annuities
A fixed indexed annuity is similar to variable annuity, however you are not participating in the actual mutual fund. Your annuity will follow an index, such as the S&P 500, and grow based on the index. Typically your index could be capped on the gains, however there is no downside the risk. The worst return you can get is 0%. This allows you to get a little more return than a fixed annuity and have no downside risk. Similar to a variable annuity, you can add lifetime income benefit riders, typically for a fee, where you can take income for the rest of your life without annuitizing the policy. This allows you to still get a lifetime income stream without giving up your money to the insurance carrier.
With any type of annuity, there is a 10% early withdrawal penalty from the IRS if you take a distribution before the age of 59 ½. Your annuity will grow tax deferred until you start taking distributions. The taxation on your distributions will depend on if the money you invested was pre or post tax.
If you have any questions about retirement in Minneapolis feel free to come pay us a visit!
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