Why Invest in Annuities? Because The Exclusion Ratios Means Tax-Exempt ROI

Why Invest in Annuities?

Exclusion ratios are tax-exempt portions of your annuity return. For example, each annuity payment you receive can be split into two distinct parts. The annuity investment capital is one portion. The other portion is an additional amount that is taxed at the current income rate. This portion is interest that you’ve earned. Consequently, it’s taxed as regular income would be. The capital portion of the return is not taxed. The return on capital, or the additional balance after the principal capital is subtracted, is taxed. This is because it’s considered part of the annuitant’s gross income.

What Is The Exclusion Ratio?

The exclusion ratio is a calculable ratio used to identify the portion payout that is excluded from taxable income. The exclusion ratio is the amount that the annuitant invested into the annuity divided by the return expected from the investment. Apply this exclusion ratio to each annuity payout. Now, identify the percentage of each return that is tax-free. Do not consider it part of gross income.

For example, say that an annuitant invests $158,000 into an annuity. The potential income stream based on life expectancy could be $264,000. The exclusion ratio would be $158,000 / $264,000, or 60%. The tax-exempt portion of a $1,250 per month payment would then be $750. The remaining $500 balance would be taxable as additional gross income.

Take the below as a more realistic representation of the exclusion ratio:

**This is strictly hypothetical. Any illustration you get from an advisor will show exact numbers.

What Is The Benefit of The Exclusion Ratio For The Annuitant?

You don’t need to add the tax-exempt return to your W2 or tax return during tax season. It’s completely exempt from gross income taxation.

Annuities calculate the payout based on the life expectancy of the annuitant. Consequently, requirements do apply for these types of investments. Use IRS tables to determine the total expected value. Different tax exempt rules apply to those annuitants who have retirement plans under the IRS public school employment laws which may allow the annuitant to have a greater amount of tax exemptions from an annuity.

How to Get Guaranteed Retirement Income for Life

Retirement Income for Life

Hitting retirement and having no guaranteed income can be detrimental to your health.

According to the American Psychological Association, older individuals with lower socio-economic status are at risk for increased mortality rates, higher stroke incidence, higher progressive chronic kidney disease, and lower health-related quality of life.

So, having a secure way to receive a steady income after retirement will help you live a full life.

But how do you go about doing that? How do you get guaranteed retirement income for life right now?

Well, we’re here to talk about how you can get a guaranteed income stream with an annuity and avoid the scammers because they are out there. So, let’s dig in.

How Does An Immediate Annuity Work?

A single premium immediate annuity (SPIA) is probably what you’re thinking of when you think guaranteed income for life.

You might be on the cusp of retirement, and worried about your income needs.

A SPIA allows your to start receiving income right away. It’s an agreement with your insurance company that allows you a guaranteed stream of income

Your insurance company will then calculate your monthly income based on a few things.

The type of annuity you purchased
The insurance company, each one prices these different and you should shop this around
Your life expectancy based on your age and gender
And the term of the annuity you’ve chosen, how long you would like your income stream gauranteed for

Your Choices When It Comes to Immediate Annuity Income for Life

Inflation can happen. It’s a risk you take when investing in pretty much anything.

But you can have your insurance carrier give you a variable payout in case of inflation.

It really depends on if you want to maximize your payment now or not.

A fixed payout will give you the most income today. But a variable payout will mean having to do with less right now. If you are retiring soon, this might be the right option as you have some income from your current job still trickling in. I would suggest looking at index annuities with a life time income rider if you would like rising income.

If you do go with a variable payout/rising income option it will most likely be tied to a stock market index with a minimum guaranteed amount.

The purpose of an annuity is to minimize risk. So go over the options and see which options will help you have guaranteed income for life.

What Are the Variables and Terms of an Immediate Annuity?

A term in insurance speak is the amount of time your guaranteed annuity income will last.

You can specify the number of years the annuity will last. This may not give you guaranteed income for life.

The life annuity will provide you income for life. This means, of course, for as long as you, and you alone shall live.

There are joint-life annuities. If you are married, a joint-life annuity option might be best.

If one spouse dies, the annuity continues to be paid to the surviving spouse.

What Variables Depend on Age And Gender?

This essentially affects your payout amount.

Of people over 100 years old, 85% are women.

Essentially, women live longer than men on average. And insurance companies take this into account.

They typically pay out LESS for women than men because of the life expectancy gap.

What Are Typical Rates for Immediate Annuities?

If you’re looking at obtaining guaranteed income for life through an annuity, then you probably want to know the rates.

Remember, you’re buying an annuity for income guarantees, then returns become secondary.

If you want higher returns, you have to take risks. And risks could leave you broke.

But, even with a guaranteed annuity, the longer you live the greater the returns.

So, don’t compare the payout rate or calculated rate of return on an immediate annuity to compare this to any other kinds of investments.

Instead, the rate you’re looking at should be used for comparison between annuities at different insurance companies.

One of the benefits of an immediate annuity is that any other capital you don’t use to buy the annuity can go to other investments.

In essence, you can build your wealth with an annuity coupled with other investments.

And the security it affords can’t be measured in the monetary rate of return estimates.

Immediate Annuities Are Only a Portion of Retirement Savings Income

This is not meant to be all the income you receive during retirement.

If you calculate the annuity rate you will receive, you will only get $558 dollars a month if you are age 65, male, live in Tennessee, and purchase the annuity for $100,000.

That’s maybe enough to buy groceries and maybe pay a bill or two.

If you want the highest payment, you will have to give up access to the 100,000 you put in.

You will want to have a diversified portfolio of ETFs and mutual fund and such to maintain your standard of living.

You might have guaranteed income for life, but that’s more of a safety net to ensure survival if other investments fail.

Again, this is more about peace of mind than returns or riches. Although, it can help you increase your wealth in the long run.

Be Careful When Buying an Annuity: Watch For Scams

You might be tempted to go with the insurance company that offers the highest payout.

Don’t. You need to do your research.

You will depend on the insurance company to remain good on their word when it comes to guaranteed income for life.

They must have an AM BEST rating of A- or better when it comes to financial strength ratings.

Only a fraction of the companies out there will give you the best deal and have your interests in mind. All the others are either not worth looking at or are downright scams.

Payouts between companies can vary widely. So make sure you compare your options and choose wisely.

The Bottom Line On Guaranteed Income for Life

If you’re about to hit retirement, you probably do want that safety net of guaranteed income.

You probably want to get an annuity with the right companies that will take care of you. And you probably want to mitigate the risk of not having an income after retirement.

If you do want these things, sign up for a free consultation to get more information on how to find the right annuity for you.

Two Distinct Phases of an Annuity

What Are the Two Phases of an Annuity?

The Accumulation (or Investment) Phase:

This is the phase in which you add money to the annuity and collect interest in some form. A purchased deferred annuity is necessary when this option is utilized. You can purchase one in one lump sum. You can make investments periodically over time.

The Distribution Phase:

This occurs when you begin distributions from the annuity. Two general options for receiving distributions are available.

The first option allows some or all of the money in the annuity to be withdrawn in a lump sum. The full contract value can be “rolled” into another agreement without paying taxes. This is called a 1035 exchange. The second option while using an income rider is to turn on the income rider. A lot advisors positioned variable annuities win the past with very expensive riders (3-4%). Their clients have never turned on the rider.

If you have an income rider and you have either not turned it on or just turned it on, you should have it reviewed as soon as possible. Most of the time you can LOWER your fees from 3-4% to 1% and get 10-30% more income! Contact me for more information. I’m here to help you.