Learn About Retirement Annuities

Understanding Retirement Annuities

An annuity is a type of insurance policy that is a source of guaranteed income during retirement. Different types of annuities are available. These include fixed and variable annuities. The different types of annuities offer different features that may help you achieve your financial goals. And, we want to provide you with the information you need to determine which one is right for you.

How Annuities Work

As an example, let’s take a look at fixed index annuities (FIAs). An FIA tracks the performance of an index such as the S&P 500. While they offer some of the advantages of index funds, they aren’t directly linked to them. This is because an FIA is not an investment but an insurance policy. Moreover, since it’s an insurance product, the insurer sets annuity rates and guarantees your earnings. Therefore, fixed index annuities protect against principal loss even when the market falls. This allows you to earn a reasonable return while still keeping your funds. 

As compared to variable annuities, fixed index annuities offer a greater potential for interest growth. They are also less risky than variable annuities.

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Two Phases of Annuities

There are two stages to annuity contracts – accumulation and distribution. In the accumulation phase, you save and build up the value of your retirement funds. During the distribution phase, you start receiving income from your annuity in retirement. 

Accumulation Phase
Distribution Phase

Tax-Deferred Annuities

Tax-deferred annuities allow you to accumulate money for retirement (cash value). Those earnings can be converted into lifetime income. LTC policies and FIAs are both examples of tax-deferred annuities. 

FIAs qualify for a tax advantage during the accumulation phase.  Taxes are only due when you withdraw your money. Also, a fixed index annuity only taxes ordinary income, not capital gains. By reducing your liabilities in retirement, you can earn more and increase income over time.

Long-term care annuities help pay long-term care costs without consuming retirement income. Additionally, LTC annuities help cover nursing homes, assisted living facilities, home health care, chronic illnesses, and terminal illnesses.

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Deferred Annuities, IRAs, and 401(k)s

Deferred annuities are meant to be withdrawn at retirement like IRAs and 401(k)s. However, fixed index annuities offer greater flexibility than an IRA or 401(k) and have fewer restrictions.
  • Contributions to the FIA are unlimited. 
  • Certain 401(k)s and IRAs can roll over into index annuities. 
  • Each year, the money you earn compounds tax-free.
  • You keep all the money you earn with tax-free contributions.

FIAs Indexed Interest Potential

A fixed index annuity allows you to allocate its value to one or more chosen indexes. When you use diverse indexes, you have several options for interest rates. Insurance companies use crediting methods to track your selected index(es). Also, the policy provider calculates the interest rate at the end of each year.

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Factors That Influence Potential Interest Rates

Some fixed index annuities may earn a maximum rate of interest. The cap usually lasts one month or one year.  If your selected index exceeds the cap, the index rate does not apply. Instead, a cap rate is used.

Some fixed index annuities calculate the participation rate after the cap. Your rate is determined by a percentage increase in the index, not the full increase.

Some annuities calculate interest using a spread. Over time, a percentage is deducted from the interest. Let’s say the annuity spread increases by 4% and the index increases by 9%. In such a case, the annuity contract would receive a credit of 5% indexed interest.

Learn More About Retirement Annuities at an Educational Seminar

If you’re considering retirement annuities, make sure they meet your needs.

We can walk you through all your options. Register for a retirement seminar or schedule a meeting with us at no cost to you.

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