With so much focus on how to plan for retirement these days, there is one type of financial vehicle designed to offer a steady stream of income guaranteed by the financial strength and claims-paying ability of the issuing insurer: the annuity. However, there are various types of annuities, and it is important to understand how each works to help determine if this type of product is appropriate for a portion of your retirement assets within your overall financial strategy.
An immediate annuity may be appropriate for a conservative client who needs income right away. This annuity converts a single lump-sum payment into a
regular stream of fixed income payments for a specific period of time, or for life.1
While an immediate annuity doesn’t provide income growth opportunity, it can provide a reliable income source to supplement other investments that need more time to grow or recover from market losses. The immediate annuity also provides tax-advantaged payouts when purchased with nonqualified funds, as a portion of the payout is a return of your original premium.
The fixed annuity is something to consider if you don’t need to start receiving retirement income until sometime in the future; say, five or 10 years.
During this time period, the funds used to purchase the fixed annuity will grow at a fixed interest rate. Once the owner decides to “turn
on” (annuitize) the contract, it will pay out a fixed level of income for a specified period of time. Again, the owner has the option to choose
The fixed annuity addresses two major concerns when it comes to retirement funding: Avoiding market losses and providing income you cannot outlive.2 While a fixed annuity can provide reliable income, it may work best as a complement to a larger retirement portfolio. That’s because the fixed payout stream does not allow for income growth opportunity over time, which is important to address the potential impact of long-term inflation.
There are also fixed index annuities, which provide guaranteed income with protection of principal from market losses, but also have the potential to provide higher interest earnings based on the performance of an external market index. This means you are earning interest without actually participating in the stock market. The amount of interest you receive from a fixed index annuity can vary, and there is a limit on how much interest you could earn.3
The variable annuity offers the greatest opportunity for growth of income,4 but it also has higher fees and increased risk.5 It
is best suited for more risk-tolerant investors who have the option to wait for a longer period of time before receiving retirement income, as this
time offers the variable annuity time to accumulate a greater income base for payouts.
The typical variable annuity offers a variety of investment options managed by a diverse selection of professional money managers. Once payouts begin, the amount may increase or decrease based on the performance of the underlying investments. While this presents greater risk, it also offers the opportunity for larger payouts to offset the impact of inflation.6
Variable annuities are known for offering diverse investment opportunities, tax-deferred growth on gains, the option for lifelong income and optional riders for income payout strategies and death benefits.7
Annuities are complex financial contracts between the purchaser and the insurance company. It is strongly advised that you work with an experienced financial advisor when considering an annuity as part of your overall financial strategy.
1CNN Money. “What is an immediate annuity?” Accessed Aug. 31, 2016.
2CNN Money. “What is a fixed annuity?” Accessed Aug. 31, 2016.
3AnnuityFYI. “Fixed-Indexed Annuities.” Accessed Aug. 31, 2016.
4CNN Money. “Variable Annuities: What are its advantages?” Accessed Aug. 31, 2016.
5CNN Money. “Variable Annuities: What are its disadvantages?” Accessed Aug. 31, 2016.
6U.S. Securities and Exchange Commission. “Variable Annuities: What You Should Know.” Accessed Aug. 31, 2016. 7 Ibid
It can be difficult to make financial decisions without access to information. If you have questions or concerns about your current retirement strategy, feel free to contact us using the form below.
Strategic Wealth Designers, LLC is a Registered Investment Advisor in the states of Kentucky and Indiana. Matt Dicken, Dustin Stanley and Jordan Schwartz are Investment Advisory Representatives affiliated with Strategic Wealth Designers, LLC. The advisors may not transact business in states where they are not appropriately registered, excluded or exempted from registration. Individualized responses to persons that involve either the effecting of transaction in securities, or the rendering of personalized investment advice for compensation, will not be made without registration or exemption.
*Guarantees provided by insurance products are backed by the claims-paying ability of the issuing carrier.
The retirement kit is provided for informational purposes only. It is not intended to provide tax or legal advice. By requesting this report you may be provided with information regarding the purchase of insurance and investment products in the future.