Annuities

What Is an Annuity?

An annuity is a financial product designed to help individuals accumulate money and, depending on the contract, receive income over a period of time or throughout retirement.

Annuities are commonly used as part of retirement planning because they can provide another potential source of retirement income alongside Social Security, retirement accounts, investments, and other assets.

The features, costs, guarantees, and tax treatment of an annuity depend on the specific contract and the issuing insurance company.

How Do Annuities Work?

When you purchase an annuity, you provide money to an insurance company in exchange for contractual benefits. Depending on the type of annuity, you may make a single payment or a series of payments.

The insurance company then manages the funds according to the terms of the contract. At a later point, you may receive payments based on the annuity's structure.

Annuities can generally be used for two stages of retirement planning:

Accumulation: Your money remains in the contract and may grow according to the terms of the annuity.

Income: The contract may provide payments to you for a specified period or, depending on the product, for your lifetime.

Why Consider an Annuity?

Retirement can create a challenge that many people do not face during their working years: turning accumulated savings into a reliable source of income.

An annuity may be considered as part of a retirement strategy when an individual is looking for contractual income features.

Depending on the product, an annuity may offer:

Not every annuity provides all of these features. It is important to review the specific contract before purchasing.

• Potential for tax-deferred growth
• A source of retirement income
• Contractual guarantees from the issuing insurance company
• Options for lifetime income
• Different investment or interest-crediting choices
• Options for beneficiaries

Types of Annuities

Annuities come in several forms, and each type works differently.

Fixed Annuities

Fixed annuities provide a specified interest rate or interest-crediting structure according to the contract. They are generally designed for individuals who want more predictable accumulation and income features.

Fixed Indexed Annuities

Fixed indexed annuities can credit interest based partly on the performance of a market index, subject to the terms and limitations of the contract.

They do not directly invest your money in the underlying index. The contract determines how interest is calculated, including any participation rates, caps, spreads, or other applicable provisions.

Variable Annuities

Variable annuities allow you to allocate money among investment options available within the contract. The value can increase or decrease based on the performance of those investments.

Because the investment performance can fluctuate, variable annuities involve investment risk.

Immediate Annuities

With an immediate annuity, payments generally begin relatively soon after the annuity is purchased. This type of product may be used by individuals who want to convert a portion of their assets into a stream of income.

Deferred Annuities

A deferred annuity separates the purchase of the contract from the beginning of income payments. The money may remain in the contract during an accumulation period before income payments begin.

Immediate vs. Deferred Annuities

The main difference is when income payments begin.

An immediate annuity is generally structured to begin income payments shortly after purchase.

A deferred annuity allows money to remain in the contract before income payments begin.

The appropriate structure depends on your retirement timeline, income needs, financial circumstances, and the terms of the available contract.

Annuities and Retirement Income

Annuities can be one component of a broader retirement income strategy.

Retirement income may come from several sources, including:

An annuity may provide contractual income that can complement other retirement resources. The amount and duration of payments depend on the contract and the options selected.

• Social Security
• 401(k) plans
• IRAs
• Pension benefits
• Investment accounts
• Other personal savings

Tax Treatment of Annuities

Annuities can provide tax-deferred growth, meaning taxes on certain earnings generally are not paid until the money is withdrawn.

The tax treatment of withdrawals depends on factors such as how the annuity was purchased, the type of contract, and the individual's circumstances.

Annuities can have tax rules that differ from traditional retirement accounts, so it is important to understand the potential tax consequences before making a purchase or withdrawal.

For specific tax advice, consult a qualified tax professional.

Annuity Fees and Contract Charges

Annuities can have fees, expenses, surrender charges, or other contract costs depending on the product.

Some contracts may impose charges if you withdraw money during a specified surrender period. Variable annuities may also have investment-related expenses and additional contract charges.

Before purchasing an annuity, review the contract carefully and understand:

Understanding these details can help you evaluate how the contract fits into your overall financial plan.

• Fees and expenses
• Surrender periods
• Withdrawal provisions
• Income options
• Death benefits
• Investment or interest-crediting options
• Any applicable limitations or charges

Annuities and Lifetime Income

One reason individuals consider annuities is the potential to create an income stream that can continue for life, depending on the contract and income option selected.

Lifetime income features can be particularly relevant when planning for the possibility of a long retirement.

However, lifetime income options can have different terms, costs, and payment structures. Review the contract carefully to understand how the income benefit works.

Annuities and Beneficiaries

Some annuity contracts provide benefits to beneficiaries after the owner's death.

The amount and form of any death benefit depend on the contract. Some products may provide a specified death benefit, while other income options can affect what remains for beneficiaries.

Beneficiary designations should be reviewed regularly, particularly after major life events such as marriage, divorce, or the birth of a child.

How Do You Determine Whether an Annuity Fits Your Plan?

An annuity should be considered within the context of your complete financial situation.

Before purchasing one, consider:

Annuities are not appropriate for every financial situation. Understanding the contract and how it fits with your other retirement resources is an important part of the decision-making process.

• Your retirement income needs
• Current savings and investments
• Expected Social Security income
• Time until retirement
• Access to other assets
• Liquidity needs
• Risk tolerance
• Tax considerations
• Contract fees and charges
• Income and beneficiary options

Review Your Annuity Over Time

Your financial needs can change throughout retirement. Major life events, changes in income, investment performance, healthcare needs, and changes in your retirement goals may affect your overall strategy.

Review your annuity and other retirement assets regularly to make sure they continue to align with your financial objectives.

If you need assistance understanding annuities or determining how they may fit into your retirement strategy, contact us today. We can help you review your options and understand the features of available contracts.