Why Annuities are a Wise Choice for Your Future

Putting off saving for the future for a later time is not a wise decision. You might argue that the money that you are earning today is meant to provide for your present needs and wants. You can always save more money when you receive a big cash flow sometime down the road, right? Wrong. This is the mistake that most people make. However large the amount of money you receive, it will always be easy for you to find things to spend it on.

Only a scant percentage of the population grow old to live a comfortable life. Most people grow old lacking the resources they need to live a decent life. You have to make a paradigm shift in the way you look at savings if you do not want to spend your old age in destitute. You have to sow the seeds today in order to reap the benefits later on in life when you need it more. Try to have annuities explained to you and you will find that it might be a good instrument to use in order to ensure that you do enjoy what you have worked hard for not only today but for the rest of your life.

There are various types of annuities that you can choose from. Your local financial institutions will be able to offer you a range of options. These options are largely determined by the amount of regular contributions that you can make today, the kind of yield you want to enjoy, and the mode of distribution you wish to have during your retirement years. If you have a large amount of money that you can already allocate for your growing your future retirement fund, you can choose to put in a lump sum payment in a single premium annuity.

Depending on your risk profile, you can choose to go for a variable annuity or a fixed annuity. A fixed annuity would assure you of a rate of accumulation for your funds while a variable annuity will allow your insurance company to shift your funds from time to time to take advantage of investment options that would give your money more yield.

Make sure you get all annuities explained because whatever kind of annuity you choose should match the financial situation you are in and the kind of retirement income you wish to enjoy when you retire.

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Advisors Are Selling More Annuities

Here's food for thought...

According to National Underwriter’s “Russell: Many Advisors Want to Pare Client Lists,” financial advisors have an average of 255 clients.

Of those surveyed, 39% said that they have been selling more annuities to their clients.

While most of the advisors already use annuities for their clients, those who don’t seem to have little interest in transitioning to this guaranteed income product. Maybe they will change their minds as clients show more interest in lifetime guaranteed income sources.

Information extracted from a post by AnnuityFYI.

Is an Annuity Right for Me?

In the past, annuities were considered investments only for people nearing retirement. But today, annuities can be smart investments for people of all ages. Remember, an annuity can be invested in a variety of different investment instruments, offering everything from modest to fast capital growth alternatives. The following are good uses for annuities:

1. You need a higher interest-rate alternative to Certificates of Deposit(CDs) and money market funds

2. You want to make your long-term savings grow faster without current taxation.

3. You need to save more for retirement, but you have "maxed out" your IRA and 401(k) or 403(b).

4. You need to roll over (reinvest) existing tax-deferred savings, like pension plans.

5. You need to guarantee yourself an income for the rest of your life.

6. You need to guarantee yourself an income for the rest of your life and your spouse’s life.

7. For purchasers of a special type of annuity called an Equity Index Annuity, You want to protect your "principal" with a guaranteed rate of return while investing in the equity markets.

Annuities vs CDs

Once upon a time, CDs were THE WAY TO GO. They offered short-term, liquid accounts. However, while the world of principal preservation options has advanced, the mindset about CDs has not changed for many people in, or going into their retirement years.

Annuities and CDs (bank certificates of deposit) are similar in that they are safe, secure investments with guaranteed rate of returns based on interest rates, both issued by large financial institutions, CDs issued by banks, Annuities offered by insurance companies, but they both possess inherent differences as well. The big differences are that while Annuities offer everything CDs offer, they carry several advantages.

1. Generally Higher returns
2. Tax-Deferral
3. Liquidity
   

CDs do have FDIC protection to guard against Bank or banking industry failure, but Annuities also have safety measures put in place by the state to ensure Insurance companies have reserve pools in place. Insurance companies may also be vetted for financial strength by obtaining their rating from objective rating firms -- Standard & Poor's, Moody's, A.M. Best or Duff & Phelps . The more solid the rating usually equates to a more solid financial backbone of Insurance Company. Higher Returns: Annuities, like CDs, are hinged to interest rates. But when rates are low so are CD returns whereas annuities have a minimum guarantee in place, usually 2% to 4%.

Your investment will never dip below the guaranteed minimum interest rate during times of falling or low interest rates. Again, low interest rates mean CD returns will be low as well. To offset the problem of low or falling interest rates, insurance companies equip annuities with guaranteed minimums. This is an agreed minimum rate of interest so that your investment is assured not to fall below the minimum performance even if CD rates do. Tax-Deferral:You pay annual taxes on CD interest earned without being able to withdraw funds until your investment term is over. With annuities, there is also a set term, but the earnings are tax-deferred.

You only pay taxes on interest earned when money is withdrawn. So with annuities the deferred tax on your interest remains in the investment earning you more and more money, instead of being paid out to state and federal tax agencies on a yearly basis. Liquidity:CDs do not allow you to withdraw any monies during term... period. Annuities have provisions that allow you to withdraw money, generally 10% of your account value annually plus many contracts allow you to remove the earned interest on a monthly basis.

Several other contract provisions allow you access to all of your funds such as in the event you are hospitalized, undergoing a life-threatening illness, subjected to a permanent or extended stay in a nursing home, or other major calamities that affect you economically. In addition, annuities can be structured to pay-out for the life of the owner over a fixed term such as five or ten years, thereby spreading out your tax-burden and providing enhanced income security.

In short, Annuities offer enhanced flexibility.

Portions borrowed from Annuity.com

The Single Premium Immediate Annuity (SPIA)

A single premium immediate annuity offers an income stream that will last as long as the annuitant (or joint annuitant, if that option is selected) lives or for a predetermined period, depending on the option selected at the time of purchase. The fixed immediate annuities include nominal, graded and inflation-adjusted payment options. There is also a variable option in which the payout is determined by the returns on the investments chosen by the investor.

In exchange for these payments, the annuitant surrenders a specific amount of money to the insurance company. These payments can be based on a single or joint life. Normally this purchase is irrevocable, and the money used to make the SPIA purchase is not available to one's heirs, even if the annuitant dies shortly after purchasing the annuity, unless a predetermined payment period was selected. However, selecting one of the available term-certain payment options will result in lower payments.

An SPIA is probably one of the easiest annuity products to understand. You give the insurance company a specific sum of money in exchange for an income stream that you can't outlive. The SPIA can offer peace of mind in bridging income shortages. For example, if a retired couple needs $4,000 per month to cover their living expenses, and Social Security and pensions provide $3,000 per month, they could purchase an SPIA that would pay out the needed $1,000 per month for as long as either one of them lived. However, they would need to keep in mind that most annuity payments aren't indexed for inflation, so over the long term, the spending power of that $1,000 would decrease.

Should the couple choose to purchase one of the few inflation-indexed SPIAs available, they'd have to either pay a higher premium or receive a lower initial payment. And since inflation-indexed annuities are only offered by a few insurance companies, there's not a lot of competition to help make those rates attractive for the annuitant. Finally, it's important to remember that the return of your principal is included in the promised payment stream.

An SPIA can also provide a "bridge" that could allow an investor to delay taking Social Security until later in life. Doing so could mean larger Social Security payments to both the recipient and his/her spouse. Boglehead Ron explained his use of an SPIA this way: "In our case, we used it as ‘SS gap insurance' since I retired at 59 but will not claim SS till age 70 (primarily for the benefit of my wife)."

Are Annuities Right For You?

There are many ways to save for retirement or if necessary, a rainy day in the future. Annuities are one example of this. This should then bring you to the question- are annuities right for me? There is one thing that is very important to bear in mind. Purchasing annuities is not the way to go for everyone. You should not buy an annuity if you have not fully funded your 401k, your 403b or your IRA (or if you do not intend to fully fund it for the calendar year presently upon you). These plans are one of the first steps in planning for your financial future and need to be taken care of before you consider investments such as annuities.

Are annuities right for you? That is a question that can be answered with a resounding yes if you have a fully funded retirement plan or plan to fully fund it and have money left over to invest. Perhaps you already have a well rounded and diversified portfolio that includes bonds, mutual funds and a stock or two. Annuities can also be an excellent complement to your portfolio. Let us look closer at how that can be.

An annuity is comparable to a retirement plan in that both allow for tax-deferred compounding until money is withdrawn from the account. However in the case of an annuity you are not limited to the amount of money you can invest. This is a big plus of such.

Most annuities feature a type of death benefit provision of one sort or another. In this case the issuer of the annuity guarantees that upon the death of the purchaser the total premiums will be paid out to the beneficiary (or beneficiaries). Not all annuities handle this in the same manner. Some "step-up" on the anniversary of the date that the purchase of the annuity was made to the highest value of any anniversary that preceded it. Others guarantee a minimum of five to seven percent interest compounded on a yearly basis while still others combine the greater of the two features described here.

But there is more additional benefits to think about when asking the question- are annuities right for me? As long as you are not receiving annuity payments you do not have to report them to the IRS as there is no tax bill nor is there a 1099. As well your creditors cannot go after the money in an annuity if you get behind or default on any debts and an annuity will never go into probate in any one of the 50 states.

Annuities: Creating Guaranteed Income for Life

Retirement today requires more planning than in previous generations. Sources
of steady retirement income have changed, as fewer and fewer workers are
covered by traditional employer-provided pensions that provide a lifetime benefit.

In addition, advances in medicine have resulted in increased longevity—today’s
retirees may spend 20, 30 or more years in retirement.

Given this landscape, workers nearing retirement face an imminent crisis:
how to generate a stream of income that is guaranteed to last throughout
retirement. Whether they have access to employment-based retirement plans
or not, achieving stable and secure income in retirement is a challenge for many
Americans.

With the decline of defined benefit plans and increased popularity of defined
contribution plans, such as 401(k)s, responsibility for managing retirement savings
has shifted from the employer to the individual. Unlike traditional pensions that
provide a stream of payments to retirees for life, defined contribution plans
typically offer a lump sum that retirees must then manage on their own.

Other than Social Security and the defined benefit system, the only means to
create a guaranteed income stream in retirement is through an annuity. An annuity
is an insurance contract that offers an efficient solution to what otherwise could
be an overwhelming asset management task: creating a steady paycheck in
retirement that cannot be outlived. It helps to ensure retirees don’t overspend and
run out of money in retirement and that they don’t live too frugally either.

Individuals without access to workplace retirement savings plans have an even
greater challenge: to independently accumulate savings during their working years
and manage those savings to last throughout retirement. An annuity can address
both of those needs.

SUCCESS OF THE PRODUCT
Annuities offer solutions to both sides of the retirement equation: They provide
ways to accumulate retirement savings and to turn savings into an income stream
that cannot be outlived.

The lifetime income option through annuitization allows retirees (and their
spouses) to maximize retirement income without having to worry about payments
stopping while they are alive. At the time of purchase, annuity owners are
guaranteed that if they choose to annuitize at a later date, they will receive
a benefit based on the purchase rates at the time the annuity was issued or
annuitized—whichever rate is more favorable to the annuity owner. Given the
changes that can occur over time with respect to the economy, longevity, or an
insurer’s costs, this is a valuable consumer benefit.

Many insurers offer additional annuity options-—such as the guaranteed minimum
withdrawal benefit—which allow consumers to create and manage income flow
to meet various income needs as they age while still offering guaranteed income
for life. Other income options, which do not have a lifetime guarantee, also are
available.

CURRENT TAX TREATMENT
By encouraging long-term savings during the working years and helping individuals
manage assets during retirement, the current tax treatment of annuities promotes
financial discipline.

For those who are years away from retirement, or are retired and have assets
that don’t need to produce income right away, a deferred annuity allows savings
to build up, free of current federal income tax. When payments are received, the
portion that comes from earnings is taxed as ordinary income.

To encourage long-term savings for retirement, there are tax penalties for
withdrawals from deferred annuities before age 59½ in addition to the income tax
due on earnings. The tax penalty is not applied to certain lifetime payouts, death
benefits, or payments made if an annuitant becomes disabled. Other exceptions
may apply.

The current tax treatment has served as an effective savings incentive: 77 percent
of individual annuity owners report that they have set aside more for retirement
than they would have if the tax-deferred growth of annuities was not available.
A large majority cite the tax treatment of annuities as a “very” or “somewhat”
important reason for their purchase.

The current federal income tax treatment of annuities is reflective of sound public
policy that recognizes the annuity’s unique role in helping Americans accumulate
savings for retirement and guarantee a steady stream of income for life.

CONCLUSION
An annuity can help American workers meet the challenges of the changing
landscape of retirement. In fact, eight out of 10 individual annuity owners say
they will use their annuity savings for retirement income.3 With the shift from
defined benefit to defined contribution plans and increased longevity, the role of
the annuity in retirement has never been more important. Policy-makers should
explore ways to encourage more Americans to turn to annuities for long-term
savings and guaranteed lifetime income.