Annuity & Retirement Planning
Throughout the course of the most recent financial crisis there has been one area of stability that has stood above the fray when purchased properly and held by the right companies. An annuity provides financial security and stability that has helped preserve untold millions of wealth in recent times.
What Is An Annuity?
An annuity is a type of insurance product which allows either multiple premium placements (Flexible Premium) or Lump sum (single premium) deposits. Dependent upon company and annuity rules, contributions can be pre-tax or post-tax or large or small. This is done in exchange for the opportunity of the Annuitant (person taking out the annuity) to receive payments at regular intervals sometime later down the road, usually at or during retirement. Annuities are usually held and obtained through insurance companies. Salesmen often say that an annuity is to an insurance company, what a CD is to a bank (for a point of reference)
Contributions to annuities are usually invested in subaccounts — usually consisting of stocks and bonds — that generate income for the insurance company and sometimes for you as well, depending on how the contract is structured.
In most cases, annuities are used as retirement vehicles. There may be penalties if you withdraw money from your annuity before you reach a certain age and in a retirement annuity or what is known as a "qualified annuity" or IRA, all withdrawals and payouts are taxable as the account grows tax deferred or without a current income tax. Usually 59 ½ is the age when additional penalties for withdrawal cease (notwithstanding income tax computations). Since many annuities feature a regular payout that is not affected by market fluctuations, many individuals are taking their retirement plans and putting them into annuities; they are worried that a market crash could wipe them out, and an annuity provides stability.
The case for owning an annuity is fairly strong when compared to the uncertainty of other financial vehicles. As stated, annuities generally sold by insurance companies, have weathered the economic storm providing clients with guaranteed growth, guaranteed income, and financial protections that have helped ease minds and preserve assets.
Types Of Annuities
There are generally 3 types of annuities:
The Fixed Annuity(FA)
There are a whole host of hybrids that mix features of both and add various guarantees either built within the contracts themselves or purchased for additional fees. However, annuities are generally tax deferred but are also subject to regular retirement account rules and regulations and, as stated, additional penalties for pre 59½ distributions.
Unlike traditional investments, many annuities, generally known as fixed or indexed annuities, do not allow the client to face direct investment in the marketplace. The interest rate is normally declared either annually or for a set period of time, therefore return are generally guaranteed by the company. The client is insulated from market risk, principle loss under most circumstances and arrangements.
The Variable Annuity(VA)
On the other hand variable annuities allow individuals to directly purchase stock and other securities within the annuities themselves. Even though funds are pooled and invested within the open market. These annuities are not without their protections. Variable annuities can be purchased with principle and interest guarantees, minimum floors and insulation against reversals in even the worst market. Most of those guarantees however come at a price that vary from company to company so shopping and comparing fees is essential for this type of annuity. Dunamis DOES NOT offer Variable Annuities
The Equity Indexed Annuity (EIA)
The newest and most successful hybrid in the annuity market is the Fixed Indexed Annuity. This type of annuity allows the account to participate in stock market growth, by a predetermined interest earning calculation based on a major consumer stock index such as the S&P 500, Dow, Russell 2000 or a combination of indexes. The advantage of this type of annuity is that there are usually no reversals or account loss in a declining market and potential gains in an increasing market all along with guaranteed minimum earnings potential.
Since their inception in 1995, fixed index annuity sales have vastly increased. Fixed index annuity sales were $480 million in 1995. However, at the end of 2009 total sales topped over $30.1 billion, the highest sales year ever! Currently, there are in excess of 247 fixed index annuities available from over 44 different insurers (Source: AnnuitySpecs.com). These index annuities differ with varying Participation Rates, Caps, Margins, minimum guarantees, available indices and crediting methods/Index Account options.
For older retirees, and retirees looking to maximize income, there are "immediate annuities" which allow significant returns especially in a depressed markets such as we have experienced. Immediate annuities which can come in any form as previously discussed, allow investors the advantage of high guaranteed and stabilized return on their accumulated investment dollars.
Money That I Can’t Outlive
One of the best features of annuities is that once an income option is chosen and payments have begun, those payments will remain for as long as you live. The potential is that an individual will earn over the course of payout more than the accumulation of the account when payments began. In the special cases where the lump sum is traded for high and immediate annuity payouts, such as in an immediate annuity, an estate plan can be implemented which allows for replacement of accumulated funds on a tax favored basis. This strategy is known as wealth replacement and usually involves some sort of trust or trust establishment.
There are all kinds of payout strategies such as 10 and 20 year period certain arrangements, which allow a guaranteed payment to a named beneficiary or estate for a certain period of years after death of the annuitant.
Can I Rollover My 401(k) Into An Annuity?
Retirement rollovers are an acceptable and fit transaction for an annuity. Until the recent financial crisis many investment advisers however, discouraged this as a strategy because retirement funds were, by nature, already tax deferred and did not generally offer the sometimes double digit growth that open market investments offered.
How Things Change!
Because of losses and continued potential losses in the marketplace, (Some 32 trillion in global wealth) either guaranteed securities such as long term treasuries or other financial instruments have become increasingly popular, but in some cases the fees associated with these type of transactions are cost prohibitive. Annuities generally mirror the income potential of those long term and generally safer investment strategies and many times have a lower or less rigorous fee schedule. Therefore annuities have become a very attractive part of many individual portfolios and a significant part of a good adviser’s recommendations.
A retirement rollover into and annuity can be one of the best moves for accumulated retirement funds insulating the retiree or job transferor from the risk of loosing accumulated funds, and allowing a guarantee upon which to build future financial accumulations. This type of rollover also allows the retiree or transferor to control access to their funds and completely sever ties with old employers which may also add another lever of peace of mind and financial security.
Our motto is:
“Don’t risk loosing what you’ve already earned,
there may not be enough time to earn it all over again.”
How Much Should I Place In Annuities?
Diversification is essential in any retirement plan. The amount that an individual contributes to an annuity should be based on need, risk tolerance and availability. Thorough planning should be done to find out the need. If an individual needs greater than 10% access to accumulated funds in a the foreseeable short term, then a long term annuity may not be generally suitable or desirable. On the other hand some individuals may not want accumulated funds to be at risk at all. An annuity may be an alternative to generally lower rates and guarantees offered by banks and credit unions.
One concept is a split annuity. A strategy that works by calculating the necessary income desired at retirement then working backwards to the tools that help achieve those goals. In most cases we find that available resources can be split between an annuity and other investment tools thus allowing the maximum diversification, safety and growth potential. As one can see, careful planning in this area is a must.
Are Annuities Backed By The FDIC or Government?
No. Annuities are generally backed by the insurance company issuing the annuity contract. Therefore finding a company that has received top ratings by independent rating companies such as AM Best is essential. As a fail-safe all insurance companies operating in the state usually participate in an insurance guarantee fund therefore allowing the additional security that if a company goes out of business, the risk and accumulations of your policy is spread to other companies.
Dunamis only works with and secures annuity contracts through A or higher rated companies. All of the insurance companies that we represent have managed the current financial crises quite well, retained their financial ratings and have followed suit of an industry that has done similarly throughout other depressions in American history.
What Company Should I Chose?
The desired company should be sought out based on your needs. Dunamis represents many of the top insurers who provide the best products and services in the country, so securing the right plan for you through us is not a problem.
Can I Place My Inheritance Or Cash Settlement In An Annuity?
The purchase of annuities, like all financial instruments, should be based on sound reasoning and planning. Annuities are a good vehicle for inheritances, settlements and award winnings such as "Lotto" winnings, an annuity is not and should not be considered tantamount to a bank account. If a person has an ongoing current financial need for funds placed within an annuity, an annuity may not be suitable. So careful planning in this area is essential.
Considerations & What I Should Do Next?
Carefully consider the options for accumulated funds at retirement or job transfer. Funds earned today will be worth less in the future due to inflation, therefore preservation and growth are of high importance. Consider the burden or strain that unexpected or long term illness may have on retirement accumulations.
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[See our page on Charitable Gift Annuities (CGA)to learn how to potentially reduce capital gains taxation and manage taxes normally associated with highly appreciated assets.]
Personal Dividends: What Is An Annuity and How Does It Work?
Retirement Planning Calculator: TD Ameritrade
Maximize Your Retirement Benefiits: Kiplinger.com
Rate Your 401k : Brightscope.com
Understanding Indexed Annuities: Annuityspecs.com
Dunamis Advisors: 5 Reasons Why An Annuity Is Suitable For A Retirement Plan