How Annuities Can Lend Safety and Stability to Your Retirement Plan

An Investment that you cannot outlive. Annuities can be an important part of a retirement plan. An annuity allows you to accumulate funds for retirement on a tax-deferred basis, and upon retirement you will receive income from the annuity that can be guaranteed by the insurer to last either a fixed number of years, or as long as you live.

A Pension that you can purchase. You pay a lump sum or payments over time. In return you receive monthly income for a specified period of time or for the rest of your life – no matter how long you live. Defined benefit pensions and Social Security are two examples of lifetime guaranteed annuities that pay retirees a steady cash flow until they pass.

Are there tax benefits to Annuities? Money that you invest in an annuity grows tax-deferred. All the money you invest compounds year after year without any tax bill from Uncle Sam. When you eventually make withdrawals, the amount you contributed to the annuity is not taxed, but your earnings are taxed at your regular income tax rate. The ability to keep every dollar invested working for you can be a big advantage over taxable investments.

How do I know if the Insurance Company will honor my future payments? When you purchase a deferred annuity you are giving an insurance company money today, and you may not receive your payments for a number of years. It is important to purchase annuities only from insurance companies that you’re confident will be in business when you retire.

Check the insurer’s credit rating, a grade given by credit bureaus such as A.M. Best, Standard & Poor’s and Moody’s that expresses the company’s financial health. Each rating firm has its own grading scale. As a general rule, limit your options to insurers that receive either an A+ from A.M. Best or AA- or better from Moody’s and S&P. You can find the ratings online, or get them from your insurance agent.

There are state guaranty funds that protect annuity owners if an insurance company fails, but the coverage is limited and varies from state to state.

There are two types of Annuity Income that you can receive. Annuities can be classified in different ways. It sometimes can be confusing, as the types are often mixed and matched to get new features and contracts. Basically deferred and immediate are the two different types of income you can receive through the purchase of an annuity.

Deferred Annuity: A deferred annuity contract is a vehicle for accumulating savings and eventually distributing the value — either as a payment stream or as a one-time, lump-sum payment. All varieties of deferred annuities have one thing in common: the increase in account value is not taxed until those gains are withdrawn (or paid out).

Immediate Annuity: An immediate annuity guarantees payments, which start right away, for a specified time period or for a lifetime. A common use for an immediate annuity is converting accumulated savings into an income stream during retirement.

There are three types of Annuity returns that you can receive, Fixed, Indexed and Variable.

Fixed-Rate Annuity: Fixed annuity guarantees to pay a specified interest rate that is based on the current rate environment. The initial rate is guaranteed for one or more years and subsequent renewal rates are guaranteed to stay above a specified minimum rate.

Indexed-Rate Annuity: An index annuity (sometimes referred to as an "equity-indexed annuity") is a special type of fixed annuity in which the interest rate is determined in part by reference to an investment-based index, such as a Standard & Poor’s index or a NASDAQ index. As interest is credited, the earnings are locked in to the account value and the account will not participate in any losses.

Because of this reference to an index, the annuity offers the ability to participate in some gains associated with a rising financial market while at the same time providing the security and guarantees similar to those associated with traditional fixed annuity.

Variable-Rate Annuity: A variable annuity offers earnings and income payments that fluctuate with the performance of specific investment funds. While variable annuities have the potential to provide high returns, they differ from fixed products because the policyowner bears investment risk and possible loss of principal.

As these products are more complex and have associated with them more risk, the broker who sells this annuity must be licensed to sell securities.

There are a number of variables that make Annuities a puzzling product. For starters, there are many types of Annuities. What may benefit one may not benefit another. Understanding Annuity features and how they fit into your overall retirement plan needs to be discussed and analyzed. You will also want to consider where to purchase your annuity and which options to include on the contract. Educating yourself is the first step, talking with a trusted professional is a logical second step.