ANNUITIES

An annuity is an insurance product that produces an income stream for a specific period of time. It could be a set number of years or for the remainder of investor’s life. The main purpose is to relieve the risk of superannuation, the act of outliving one’s income. It is often considered to be a wise investment choice in retirement planning.

Once an annuity is purchased, it is scheduled to make payments, usually monthly or quarterly. This is ideal for retirees who need a reliable source of income.

The size of the payment is determined by:

  • The client’s age and gender
  • The particular payment period
  • Type of annuity – a fixed, indexed, or variable product

While annuities are generally considered conservative investments, there is some risk.

  • A fixed-income annuity guarantees a predetermined amount of income and preservation of principal. This is similar to the way a CD works when it accrues a stated amount of interest.
  • Income from an equity-indexed annuity will fluctuate because it’s affected by the underlying investments’ performance. The principal, however, is still guaranteed.
  • A variable annuity does not offer the same protection as the other annuities listed here. It invests in stocks, bonds, real estate, and commodities. Neither the principal nor the income in a variable annuity is guaranteed. This means that these investments may lose value.

Benefits of an Annuity

An annuity grows tax-deferred until the funds are withdrawn from the account. The funds cannot be withdrawn until age 59 ½. In many cases, they’re exempt from probate and creditors. Although exact qualifications and rules do vary from state to state.

Unlike other tax-deferred retirement vehicles, there’s no annual limit to the money that can be invested in a stand-alone annuity.1 While this is a plus at any stage of life, it’s especially helpful as retirement approaches. An annuity offers the chance to save as much money as possible without sacrificing the tax-deferred status. When it comes to saving for retirement, every dollar counts!

Is It a Smart Investment?

An annuity can be a strong contributor to a diversified portfolio designed to fund retirement. If the 401(k) and IRAs are maxed out, and money is still available, an annuity could be a smart choice.

1Most annuity carriers have proprietary limits on the amounts that they will accept.