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Annuities as a Retirement Planning Tool
Create a
guaranteed income stream with annuities.
What is an Annuity?
An annuity is a contract between an individual or married couple and an insurance company that promises to pay a stream of payments either now or in the future.
Annuities can be a good tool for addressing tax-deferral, market volatility, lifetime income, guaranteed income, estate planning and passing on wealth.
Annuities may or may not be a suitable investment choice for an individual. Annuities should be evaluated carefully based on factors such as unique financial situation, age, long-term goals, risk aversion, and liquidity needs.
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WHY ANNUITIES
FOR RETIREMENT PLANNING NOW?
The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 allowed 401(k) retirement plan providers to offer annuities as an investment option.
Participants can replace all or part of their 401(k) with an annuity, guaranteeing lifetime income and replicating the traditional pension plan.
Annuity Advantages
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Guaranteed lifetime income is provided (in certain annuities with an Income Rider)
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Tax-deferred growth means no annual taxes due
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Initial investment principal is preserved (in certain annuities)
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Death Benefits are provided (in certain annuities) and can often be accelerated to provide Long-Term Care benefits
Most Common Annuities
Fixed Annuity
Pays a fixed rate of interest which can change periodically but is subject to a minimum rate. The amount invested is credited with a fixed interest rate.
Fixed Indexed Annuity
Pays a rate that is tied to a market index such as the Dow or the S&P 500, etc. The annuity will not pay the full positive return of the index, but the principal is protected when the index return is negative.
Variable Annuity
Pays a variable rate of return depending on the return of the markets. The annuity is directly invested in the market through mutual funds, ETFs, etc.
Purchasing Annuities
Annuities require a minimum of $25,000 investment.
Annuities purchased using tax-deferred funds from IRAs, 401ks, pension plans, Keogh plans, and other employer-sponsored plans are called Qualified Annuities. Because these funds were never taxed, the entire amount of any withdrawal or death benefit will be subject to ordinary income taxes.
Annuities purchases using after tax-money in checking, savings, or money market accounts, Certificates of Deposit (CDs), investment accounts, etc. are called Non-Qualified Annuities. Withdrawals are generally subject to ordinary income tax to the extent that the withdrawal includes gains in the annuity (current value minus initial principal).
NOTE: When purchasing annuities, it is especially important to choose a company that has a high rating with AM Best Company. Founded in 1899, AM Best is the world’s largest credit rating agency specializing in the insurance industry. Ratings of A+ and A++ indicate a “Superior” ability to meet ongoing obligations and ratings of A or A- rating indicate an “Excellent” ability to meet ongoing obligations.
Annuities are not insured by the FDIC or any government agency and are not guaranteed by any bank. Any guarantees and protections are subject to the financial strength of the insurance company that issues the annuity.