When considering retirement income, annuities are often a point of much debate and confusion, but they don't have to be. Understanding what they are and how they work is crucial in deciding if they are right in your retirement income plan.
What is an annuity?
Technically an annuity is nothing more than a fixed sum of money paid to someone each year usually until death. Often times this involves a contract between you and an insurance company in which you make a lump sum payment or series of payments and, in return, obtain regular disbursements beginning either immediately or at some point in the future. The goal of annuity is to provide a steady stream of income during retirement.
What are the types of annuities?
- Variable Annuities: A variable annuity is a tax-deferred retirement vehicle that allows you to choose from a selection of investments, and then pays you a level of income in retirement that is determined by the performance of the investments you choose.
- Immediate Annuities: An immediate annuity is an insurance product that gives the buyer a guaranteed stream of income in exchange for a lump sum of cash. Immediate annuities have several advantages, such as long-term stability, tax-deferred income, and monthly income payments for the rest of your life.
Why do annuities get a bad rap?
- Can be expensive: Remember, like all insurance products, as a way to mitigate risk from the customer to the insurance company, there is a cost associated with it. But, like with any insurance policy, sometimes the cost is worth the risk and fits the situation.
- Poor way to transfer wealth: Transferring wealth with an annuity is cumbersome. Due to the tax-deferral for the owner of the annuity, the beneficiary will end up with the tax burden.
- Lack of understanding: Many times we've seen new clients that are confused about their existing annuity, don't understand how it works or even the reason they purchased it. Another problem we have seen is that annuities get sold when people are most fearful of the market, many times at the wrong time.
Why would someone get an annuity?
A variable annuity allows for tax deferral and potential compound growth. Again, this is not a great way to pass wealth down to the next generation, but for the purchaser it does provide a tax advantage. The biggest advantage is the income stream and the ability to be used in your retirement income strategy.
If you want more information on annuities or need help understanding your existing annuity, please, give us a call at 320.222.4236 or email me at email@example.com.