Annuity Concept Mind Map with Related Terms like Retirement, Rollover, Fixed, and Investment

Annuities: What They Are and How They Work

Having enough retirement income is a top concern for many Americans nearing or in retirement. Even though they may have saved consistently throughout their 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, principal protection, and 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 decrease 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 Annuities- Fixed annuities are designed to provide a stated rate of return over a defined period and may include income options, while offering principal protection.

· Principal Protection- original principal plus all credited interest is guaranteed.

· Growth- a fixed rate for a declared period.

· Tax-Deferral- a benefit for non-qualified assets, not applicable to IRA, 401(k), TSP, etc.

· No Fees on Base Product

One example of a fixed annuity is a multi-year guaranteed annuity (MYGA), which offers a fixed rate for a defined period. You can review current MYGA rates to better understand how these annuities are structured.

Before purchasing a fixed annuity, investors should work with their financial professionals and consider the issuing company's rate, terms, ratings, and service levels.

Fixed-Indexed Annuities- Provide growth opportunities with income for life and offer 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.

· Provides guaranteed income for life.

· Inflation hedge- growth is designed to increase when prices are appreciating.

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

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.

Annuities are just one component of a broader income strategy. To see how they may fit into your overall retirement picture, learn more about our income planning approach.

A financial advisor with a fiduciary duty provides this commentary and serves individuals and families across Arizona.

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