For your peace of mind in retirement

Understanding Annuities

Annuities can function as a strategic part of your retirement plan, helping you plan for financial challenges like rising healthcare costs and an increasingly unpredictable global market. Every retirement plan and retiree is different, with different personalities, goals and worries. Some people are more risk-averse, for example, or simply have fewer assets and therefore are less comfortable with putting those assets at risk. Other people truly love the process of investing in the stock market, or they have amassed enough assets that they are less worried about the risk, perhaps. You have to know yourself and what will make you comfortable, because who wants a retirement filled with worry?

The first thing you need to know is that there is no simple definition of annuity. “Annuities” is a broad category of financial products that are offered by insurance companies. Within that category, there are numerous kinds of annuities. Even annuities that are called the same thing can behave very differently depending on the specific contract and terms attached to it. Keep in mind that you and your needs are the most important factor in choosing whether annuity is right for your retirement plan, and if, so which one.

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How Do Annuities Work?

Annuities are filed with and approved by state insurance regulators. Fixed annuities have NO market risk, and owners of fixed annuities do not participate directly in any financial market. Whether interest is declared in advance or determined by the performance of a market index, that interest, along with the premium paid, is guaranteed NEVER to go down because the markets do. Here are a few highlights about these powerful products:

Insurance Protection

Annuities do not have FDIC protection. Insurance companies display their financial strength by obtaining a rating from objective rating firms such as Standard & Poor’s, Moody’s, A.M. Best, or Duff & Phelps. A solid financial backbone is usually accompanied with a solid rating.

Interest Rates

There are several variations of annuities. A fixed annuity provides a guaranteed minimum return by the issuing insurance company. A common guarantee on a fixed annuity may range between 2% and 6%. An indexed annuity credits interest based on the performance of a particular index such as the S&P 500.

Tax Treatment

All annuities grow tax-deferred; however, special action must be taken with qualified and non-qualified accounts. Taxes are only to be paid when money is withdrawn. The taxes that are being deferred remain in the account to earn you more money, rather than being paid to state and federal agencies every year.


Annuities do have provisions that allow money to be withdrawn. Generally, 10% of the account value is available for withdrawal, and many contracts allow earned interest to be withdrawn on a monthly basis. Additionally, there are contract provisions that allow access to all your funds in the event you are hospitalized, undergoing a life-threatening illness, subjected to a permanent or extended stay in a nursing home, or experiencing another major calamity that affect you economically. Annuities can also be structured to pay-out for the life of the owner for a fixed term such as five or ten years; this spreads out your tax burden as well as provides enhanced income security. Annuities are long-term savings vehicles and may require a 10% federal tax penalty for withdrawal of funds that exceeds those discussed above prior to age 59 ½.

Misconceptions About Annuities

You may have heard the saying, “It’s not your father’s annuity.” That’s because annuity products have evolved significantly throughout the past decade. This has also contributed to an environment full of mixed messages regarding the pros and cons of annuities.

Have an article you’ve read with the information you need help clarifying? Looking for specific information about a particular product? Not every annuity is right for every client. To find out what makes sense in your unique financial situation and more about how annuities can positively impact your retirement future, contact the Trajan Wealth team.

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*Guarantees are based on the claims-paying ability of the issuing insurance company.

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