Annuities: What they are and how they work

Annuities: What They Are and How They Work

Share this:

Having enough retirement income is a top concern for many Americans nearing or in retirement. Even though they may have saved consistently throughout the working years, they may be concerned that their retirement plans will succeed. A successful retirement plan provides the ability to maintain your lifestyle for the duration of your life.

Having enough retirement income for what you need and want is essential and must be planned for, even in the best economic conditions. A way to provide income safety is by using annuities as an asset class in your retirement portfolio.

Annuities Provide Safety and Income

Annuities help retirees address a specific retirement planning risk- Longevity Risk. Longevity Risk is the risk that a retiree outlives their financial assets. Here are other things to know about annuities:

  • Annuities provide income for life.
  • Due to their safety and growth potential, many portfolios use annuities in the financial services industry as an asset class.
  • Annuities are contractual agreements with an insurance company that provide an investor with a guaranteed income stream during retirement in exchange for a premium.
  • Insurance companies provide products such as annuities to help individuals manage their long lives.

Annuities offer tax-deferred growth of earnings, protection of principal, and a guaranteed lifetime income. The three types of annuities widely used in financial planning are fixed annuities, fixed-indexed annuities, and variable annuities. Like any financial product, there are pros and cons to each type, and due diligence in investigating any annuity should take precedence before purchasing one for your retirement portfolio:

Variable annuities: Tax-deferred growth opportunities, but with the risk of principal loss.

  • Potentially Greater Growth.
  • Provides a guaranteed income for life.
  • No Principal Protection.
  • Market-type returns are based on the asset class in the portfolio.
  • Invests in Mutual Funds (i.e., Sub-Accounts).
  • Tax-deferral benefit for non-qualified investments, not applicable to IRAs, 401(k), TSP, etc.
  • Limited Investment Choices in Comparison to the Universe of Mutual Fund Choices.
  • Fees Can Range from 3% to 5%., or more.

Variable annuities can be expensive and come with many fees, which decreases the accumulation value. Variable annuities are market sensitive and may incur a loss to the investor. Many times, the investor needs to understand this complex product. Working with a financial professional to know if a variable annuity is appropriate for your situation is essential.

Fixed-Indexed Annuities: Provides growth opportunities with income for life and offers principal protection.

  • Principal Protection– original principal plus all credited interest is guaranteed.
  • Growth– credited interest tied to index performance. Some products offer uncapped strategies—an inflation hedge on the portfolio.
  • Tax-Deferral– a benefit for non-qualified assets, not applicable to IRA, 401(k), TSP, etc.
  • Inflation hedge– growth is designed to increase when prices are appreciating.
  • Provides guaranteed income for life.

Investors should consider the fixed annuity index, participation rates, and service levels of the issuing company before purchasing a fixed-indexed annuity.

Talk to us today

Both Fixed and Fixed-Indexed Annuities provide an alternative for retirees seeking income other than from traditional staples such as CDs, money market accounts, or bonds. For those seeking income and safety, annuities may be an asset class to consider, if appropriate for their situation. You can read more about annuities here or give us a call.

© 2024 Trajan® Wealth LLC. Nothing in this blog is intended as investment advice, nor is it an offer to buy or sell any security. Please consult your financial advisor for questions about your personal financial situation. All investments involve risk, including the potential for loss. Trajan Wealth clients and employees may have a position in any of the securities mentioned. Portfolio holdings and other data are subject to change at any time and without notice. Additionally, the above links provided as a convenience and for informational purposes only; they do not constitute an endorsement or an approval by Trajan Wealth, L.L.C., of any of the products, services or opinions of the corporation or organization or individual. Trajan Wealth, L.L.C., bears no responsibility for the accuracy, legality or content of the external site or for that of subsequent links. These materials are for informational and educational purposes and are not designed, nor intended, to apply to any person’s individual circumstances. It does not take into account the specific investment objectives, tax and financial condition, or particular needs of any specific person. Please consult with your legal and/or tax advisor before making any tax-related decisions.