Should I Allocate Retirement Savings Into An Annuity?

Allocate Retirement Savings

Want to augment your retirement savings with a steady stream of income? You might want to consider devoting a portion of your savings into an annuity.

An annuity is a contract between you and an insurance company. You can make either a lump-sum payment or a series of payments. In return, you receive regular disbursements either within a month or at some time in the future. There are different types of annuities, but all fall under the two major categories: Deferred and Immediate.

With an Immediate Annuity, you can start receiving your payments within 30 days after your initial investment. A Deferred Annuity is different, however. Your money is invested for a period of time until you are ready to start receiving disbursements. Most deferred annuities are associated with retirement income. You can invest a lump sum or build up funds over time by contributing on a monthly basis. This way, you can then “annuitize” or convert, that amount into an income stream.

Many people ask whether it’s important to allocate their retirement savings into an annuity. Unless you opt to live an incredibly frugal lifestyle, it’s likely that you’ll need an annuity to meet your retirement income goals. Read on for why.

Why Do I Need An Annuity To Supplement My Retirement Savings?

The dream of every retiree is to maximize their lifetime income and reduce the risk of running out of money. First, define your preferred asset allocation. Think about how much to invest in stocks and bonds, and leave room for adjustments. The changes might involve taking a portion of your portfolio and investing in a Deferred Annuity.

Instead of retaining a portfolio mix of 40% stock and 60% bonds, you can adjust it to create room for Index annuities. Consider a portfolio comprised of 50-60% stocks/mutual funds, 30% Index Annuity, and then the difference in cash. Annuities are attractive to many investors because they provide a way to build tax-deferred savings. They also reduce the risk of running out of money by generating a steady flow of income.

Annuities Protect Your Retirement Savings

Just like a portfolio of stocks and bonds, annuities have the characteristics of standard investments. What sets them apart? Annuities come with insurance features. They help you reduce or transfer the risk of investing part of your portfolio to an insurer. Consequently, allocating some of your money to an annuity offers some insulation from the uncertainties surrounding the stock market.

Your primary goal is to have a guaranteed stream of income (more than what Social Security alone can provide) in retirement. Consider allocating some of your savings to an annuity. Research shows that investors who have an annuity tend to be happier in retirement. Annuities are a guaranteed pension-like income supply.

Do be careful when selecting your annuity. Some annuities come with high fees. These can cut your returns in the long run. Others charge penalties for early withdrawals and most of them are damn complicated.

How Much Of My Retirement Savings Should I Allocate To An Annuity?

No rule will tell you the percentage of one’s savings that should be put into an annuity.

Even if such a rule existed, you wouldn’t be obliged to follow it. The amount to save is based on a strategy tailored to your financial goals. To come up with such a strategy, you will first need to know how much your living expenses will be during retirement.

Start by drafting a retirement budget. There are some online tools such as BlackRocks Retirement Expense Worksheet. You can use this to estimate what your retirement expenses will approximately be.

Next, determine how much of your expenses can be paid from your pension and Social Security. Say your pension and Social Security payments are enough to meet all of your retirement expenses. You may not need additional income from an annuity. The withdrawals from your nest egg should be enough to cater for all your living expenses.

However, if you find a huge gap between your living expenses and what pensions and Social Security will pay, then you should consider devoting some of your savings to an annuity. You can use this retirement income calculator from T. Rowe Price to gauge how long your income might last at different withdrawal rates.

What Kind Of Annuity Is Best For Me

If you decide to allocate some of your savings to an annuity, the next question that needs solving is whether to invest in a fixed or a variable annuity.

With fixed annuities, the backing insurance company agrees to pay the investor a fixed rate of interest for the first year. Thereafter, the company can raise or lower the rate but not below a guaranteed minimum. Better even, fixed annuity interest is not taxed until you withdraw the money. Should you choose to withdraw the interest earnings before age 59 1/2, you will pay not only the tax but also a 10% penalty. Upon reaching the age of 59 1/2, you can withdraw 10% of the fixed annuity amount without any penalty. Any withdrawal above 10% of the account’s value could result in a surrender charge payable to the insurance company.

A variable annuity, on the other hand, works like a mutual fund. You can invest in multiple ‘subaccounts’ which can own stocks or a combination of mutual funds and bonds. Unlike fixed annuities, variable annuities have no guaranteed returns because the principal is invested in multiple subaccounts comprising mainly of mutual funds and money market instruments.

Therefore, you get to decide how you want your premiums invested as well as how much risk you are willing to take.

It’s also important to note that subaccount values fluctuate with changes in market conditions. This means that with variable annuities, the principal may be worth less or more than the original amount invested. If you are wary of market fluctuations, you might consider investing in fixed annuities as you can never lose the principal (guaranteed) unless the insurance company fails.

Annuities Can Supplement Your Retirement Savings With Income For Life

Note that the amount you get depends on many factors such as age, the amount you invest, and interest rates.

Despite all their benefits, it’s important first to weigh all the pros and cons to determine whether annuities are your best investment options.

Before investing, it’s advisable to take the advice of an unbiased professional who knows the pros and cons of annuities and other financial instruments.

Should I Purchase an Annuity for Regular Income?

Annuities for Regular Income?

Do you sometimes have trouble with money management? Do you often worry that your regular income isn’t enough to support yourself?

If so, an annuity might help you out.

If you aren’t great with money, an annuity seems very confusing. There are a lot of misconceptions or simply lapses in knowledge that can make understanding annuities very difficult.

Because if this, it can be very hard to figure out whether or not you should purchase an annuity, and whether something like that is the right step for you to take in your financial plan.

Have you had these doubts? If so, you aren’t alone. It’s been found that while 84% of retirees want annuities, only 14% actually buy them.

A lot of this hesitation probably stems from a lack of knowledge, which is understandable. You don’t want to pick something that you don’t understand, especially when it comes to your finances.

Luckily, we’re here to help. Here’s everything you need to know about annuities, and whether or not you should consider them for your regular income.

How Do Annuities Work?

Basically, annuities are for people who are worried about outliving their income.

It works fairly simply. With a DIA (Deferred Immediate Annuity), you buy payments, which are then converted into payments that last for the rest of your life.

There are some annuities that are variable. These can pay out more but are also at a higher chance of risk because you’re investing in mutual funds.

Then there are fixed annuities, which are much less risky but also may not see as much profit.

Annuities are often very personal and specific. We’re here to advise and educate you, based on your unique needs and goals, which annuity will help you reach your ideal financial future.

Things that you should consider when looking to purchase an annuity are your income needs, risk tolerance, and investment objectives. These are all factors that will go into deciding whether or not you wind up using a fixed index or a variable annuity. But some people have more questions when it comes to annuities. Even after learning how they work, some doubts linger.

Is an annuity right for me? What’s the catch?

It’s easy to worry that you aren’t understanding the true risks and rewards of an annuity. That’s why we’re breaking it down a bit further.

What Are The Pros And Cons Of An Annuity?

Like any investment option, annuities come with both pros and cons.

Here are some of the benefits of annuities:

You never have to worry about running out of money after you retire.
Many annuities keep pace with inflation.
It’s less work at an age where you probably don’t want to be doing that sort of thing.

But, of course, there are some cons when it comes to annuities, as well. Here are some things you should watch out for when purchasing annuities:

Not all annuities are created equal. You have to make sure that you’re getting yours from a reputable source.
If you pass away before you get your money’s worth, money that could have gone to your heirs will stay with the annuity company. This is only true if you annuitize your annuity. If you purchase an income rider, your beneficiary will get the account value that’s left in your annuity at the time of your passing.

Like any financial plan, there are some risks involved when it comes to annuities. Knowledge is power and there are a lot of professionals who will keep you from learning so that the sale is easier for them. Ask us. We offer free consultations, so if you have any worries about the risks, we would love to talk with you about them and set your mind at ease.

How Do I Know If An Annuity Is Right For Me?

There are a few things you should consider if you’re thinking about getting an annuity. The first step is to ask why you want an annuity. You should only get it if you think you can really benefit from it. Are you struggling? Worried? Unsure about running out of money during retirement?

These are great reasons to invest in an annuity. Outside of that, though, there are some other factors to take into account. Annuities aren’t for everyone, after all. Financial plans should be unique to your situation. There’s a specific situation that annuities work for, so you need to think carefully.

For example, just how much are you able to dedicate to an annuity? Once you pay for it, there’s no getting that money back, so you have to be very careful. Put too much of your regular income into it, and you’ll wind up struggling. Your age and health are also things to consider. You want to make sure that you’ll live long enough to get the benefit of the annuity. But if you have the money to put away and are in relatively good health, a Fixed Index Annuity might be the perfect step for you to take.

How Do I Get An Annuity For Regular Income?

Now that you’ve carefully considered annuities, their risks and rewards, and whether or not they’re right for your regular income, it’s time to take the next step.

Earlier, we said we’d give a free consultation. And if you’re ready to take that step, we’d be more than happy to help you. We know that each financial situation is unique, so we promise to give you the attention that you deserve when it comes to your financial plan.

Or maybe you’re still unsure about whether or not an annuity is for you.

That’s okay! There’s a reason that so few people have these, despite wanting them. They’re confusing, and if there’s one thing you don’t want to make a misinformed decision on, it’s your finances.

That’s why we are full of tips and tricks when it comes to understanding annuities. If you’re looking to become an expert, look no further than our expert advice!

We want you to be comfortable and confident in your financial future. So if you’re looking for more information on annuities, look no further than our site. We’re glad to help you learn more in any way that we can!

Check or Bet: What To Do With An Annuity

What To Do With An Annuity?

The fastest growing segment of the population are folks 60 and older. How many of these Baby Boomers have set aside enough money to use for the rest of their lives? A third of people over 65 have less than $30,000 in savings when entering retirement.

Is an annuity a good investment option for you? How do you decide to check or bet when it comes to buying annuities?

Here are the top reasons to bet on and check out annuities.

Top Reasons Why You Should Check Or Bet On An Annuity

You’ve Maxed Out Other Retirement Savings Options – Bet

Contributing to a 401(k) and IRA deferrals are a great idea until you reach your max.

Say you’re in a high tax bracket and you’ve maxed out your 401(k). You will be in a lower tax bracket when you retire. In this case, an annuity is a great option for you.

The average fee to have an income rider attached to your Index annuity is about 1%. For example, if you invest $100,000 in an annuity with an income rider, your fee will start off at 1% of $100,000 or $1,000 per year. BUT PLEASE REMEMBER: THAT FEE WILL GO UP EVERY YEAR BASED ON EITHER THE ACCOUNT VALUE GROWING OR, IN MOST CASES, THE BENEFIT BASE GROWING.

You Already Have All the Money You Will Need to Live on For A Long Time – Check

Check or bet? Are you wealthy, have a paid off mansion, and have trusts set up for your children and grandchildren? Pass on an annuity.

You are more than taken care of for the rest of your life and won’t need annuity payments.

You Have Enough Financial Assets to tie up a lot of Money for a Long Time – Bet

If you’re young when you enter into annuities, you won’t have access to your investment for a long time.

Say you come into a chunk of money when you’re 30 and want to invest in an annuity. Can you make it without those funds for another 29 1/2 years? An annuity may be good for a portion of that money.

Have a well-funded savings account and a diversified portfolio to compliment it.

You have a Health Condition That Could Shorten Your Life – Check

Annuity income depends on you surviving past your life savings. A short lifetime due to health concerns makes annuities less attractive investments. You can choose to have a beneficiary on an annuity. They will receive the account balance the day of your death.

There are better options for inheritance that would carry a lighter tax burden. Low-risk investments like mutual funds would be a good option. But an Index Annuity can help you manage the disbursement of those payments after you pass away. For example, if your Index Annuity grew to $100,000 and you passed away, you could dictate to the insurance carrier how your beneficiaries will receive those funds. This means that instead of a lump sum payment to one kid, you could dictate that he receives $1,000 a month until the contract goes to zero.

You are 60 Years Old or Older and Won’t Have Dependable Income in Retirement – Bet

Annuities protect you from outliving your retirement savings. Say you’re near the retirement age, annuities are an even better bet. If you are a healthy 60-year-old man, you could live another 20 years. Are you a woman, another 40? 85% of people over 100 years old are women. Can you afford to live that long? Check or bet? Bet – An annuity can guarantee it.

You are Young and Don’t Already Have an Investment Portfolio – Check

Annuities are a good addition to an already diversified portfolio to cut risk. If you are still young and in the beginning of your career, you have time to invest in higher risk options. Consider investing in mutual funds and stocks first and adding an annuity in your older age. Annuities should supplement the savings and investments you’ve already saved.

You Aren’t Willing To Do Your Own Research – Check

Annuities are confusing.

You need to do your own research and go through the product with a fine tooth comb. Fill out this form and call us. We’re here to help you navigate the annuity waters.

There are consultants who will offer products that carry high commissions but a low value to you. These products are often the most confusing. If you want an easy, straightforward annuity option, you’ve come to the right place. We are industry leading professionals who here to help and educate you.

Other Factors to Keep In Mind When Deciding on Annuities

Tax rates need to be a factor when deciding to check or bet on an annuity.
When the payout starts for the annuity, it will count as regular income. Generally, the capital gains tax rate is 15%. This is the tax you would be facing if cashing in on stock or other investments. This is a consideration that we will discuss while meeting with you. That higher tax rate also gets you the lowest risk. A fixed annuity has a guaranteed payout even if the market fluctuates.

IRA’s and other investments fluctuate with the market. Your investment may be suffering a loss when it gets to crunch time and you need that money. A guaranteed annuity is a great backup plan for these other investments. You will also earn more interest on Fixed Annuities than a savings or money market account.

Riders can make annuities more attractive to those who have decided to check. You can add extended care or terminal illness waivers to cover long term care. If you have a family history or have a condition that may need these services, this rider could be a benefit.

You can add a death benefits rider to make your annuity a better inheritance. These allow for value gains for the beneficiary following your death. While still not the best choice for inheritance, this can make the situation a little better.

Adding these extra products to the annuity you’re looking at can make them a better bet for you. The last thing you want when you are approaching the sunset of your life is to worry about money. Annuities provide a guaranteed source of income which can be comforting. Choosing between different types, different rates, and other options can all become overwhelming.

We want to help provide clarity on your best options for retirement. We want you to be set up with guaranteed income for life. Let us answer your questions and clear up any confusion you may have.

Credit Rating Agencies: Which One Should I Trust?

When you’re looking through different annuity selections with your financial advisor or consultant, knowing which insurance offer to trust makes a big difference. Credit rating agencies rate insurance companies with a grade or percentage. This score assigned to each independent insurance agency indicates that company’s ability to pay policyholders’ claims.

The Big Four: A.M. Best, Comdex, Moody’s, and Standard & Poor’s

Financial rating services such as A.M. Best, Comdex, Moody’s, and Standard & Poor’s rank insurance companies based on their financial strength and stability. Before you invest in an annuity, check that annuity’s insurance provider’s ranking. These financial rating agencies are independent and they all have their own rating scale based on their own standards. Which rating service should you use?

A.M. Best: An A- and Above Means A Solid Insurance Provider

A.M. Best is a financial rating agency whose main focus is on the insurance sector. Only trust an annuity provider whose ranking is an A- or higher. A score of an A- or higher indicates a score of ‘Excellence’. This score means that your insurance company is able to pay you back the principal of your annuity as well as the claimed gain. The insurance company is secure and reliable. Superior scores are “A++” and “A+”. Scores lower than “A-” are vulnerable to economic conditions. Use this as your guide to the reasoning behind A.M. Best’s ranking.

Comdex: Look for 80% or Higher for Your BEST Annuity Ranking

Comdex is one of the best-ranking scales for insurance providers. The financial rating agency ranks insurance companies with a score from 1 to 100. Each number represents a percentage, and the higher the number, the better the ranking. The Comdex score is one of the best rankings that you can hold accountable for the security of your annuity because it takes all of the available ratings from other financial rating agencies and puts them all together.

Look for a score of 80 or higher. This means that of all of the rankings given to that insurance provider, the average score is higher than 80% of all other insurance companies. Why is the Comdex score the best? The Comdex ranking already includes all of the ratings given to your annuity by other agencies and tallies up their score in order to give you a neat, consensus of all the ratings put together.

Moody’s: The Less Trusted Ranking For Insurance Companies

Moody’s offers grades ranging from Aaa (Superior) to C (Failing). Aaa is given to the most stable financial institutions and indicates security. C is given to companies that are going through financial difficulty. The trouble with using Moody’s as a ranking system for your insurance provider is that it specifically doesn’t concentrate on future reliability. Rather, Moody’s focuses on the past.

Would you really want to only look at your insurance provider based on past creditworthiness? The ability to look into the future based on fiscal trends and economic outlook is important for your interest in annuities because they are typically integrated into your retirement plan, which is in the future.

Standard & Poor’s: The 150 Year Old Insurance Rating Organization

Standard and Poor’s (S&P) is one of the oldest rating agencies. It ranks a company’s creditworthiness by assessing its debt issues, company climate changes, and changes in insurance regulations. The grade given by Standard & Poor’s ranges from “AAA” to “D”. A score of “D” means that the company has defaulted on financial obligations. As the score moves up the ladder towards AAA, the vulnerability of the company decreases.

Standard & Poor’s should not be used by itself when judging which insurance provider deserves your hard earned cash because so many factors can affect an S&P score that doesn’t necessarily have to do with your annuity. For instance, if your insurance provider focuses solely on annuities, the S&P score is going to rank lower because the S&P doesn’t like a narrow business focus.

Which Credit Rating Agency Should I Use For Judging Which Annuity To Buy?

Great question. All four. If you can’t get access to scores from all four, choose Comdex and A.M. Best. These rating agencies focus on the insurance industry, rather than the business sector like the S&P and Moody’s. Therefore, if you can only squeeze two scores out of your financial advisor, choose Comdex and A.M. Best, whose standards reflect an insurance companies ability to pay back long term investments and retirement-focused financial obligations. Remember, your minimum Comdex score should be 80 and your minimum A.M. Best score should be A-.

The Importance of Understanding The Different Types of Annuity

Understanding Different Annuities

Receiving A Paycheck For The Rest Of Your Life Sounds Great, Right? This isn’t a dream. It’s actually possible thanks to annuities.

Annuities are a form of life insurance. You pay a sum of money (called a single premium annuity, not to be confused with a SPIA). This can be either all at once or over a period of time (flexible premium annuity). In return, your money does not go down (only if you buy from one of our advisors), it only goes up (depending on the crediting option you choose). Also if you buy an income rider (you will pay a fee, should only be about 1%) you receive regular disbursements of that money until you’re no longer living.

A staggering 84% of Americans believe that this is a beneficial concept, yet only 14% have actually purchased an annuity themselves.

A primary reason for the hesitation: A lack of knowledge around annuity options and uncertainty around purchase procedures.

It’s important to understand that not all annuities are created equal before you sign on the dotted line.

Interested in learning more? Let’s dig in!

The Big Two: Deferred Annuities Versus Immediate Annuities

Our discussion on the different types of annuity must begin with the two major categories: deferred and immediate.

Deferred Annuities

Put simply, deferred annuities are those that you don’t receive until a set time in the future. Essentially, you pay your premiums in full, then wait. Some you can add money to called a flexible premium. I like the flexible premium annuities because they allow you to make additional deposits and all of the money matures at the same time. Again this is only available when you buy through our network of advisors. We have removed 90% of the annuities on the market and only allow the top 6-8 insurance carriers to be sold. That said other insurance people or advisors will sell you anything just to make a commission, we make sure you don’t get screwed.

The obvious advantage to this type of annuity? The longer your money sits, the more it grows. In addition, the investment remains tax-free until you’re ready to pull it out, at which time it’s taxed at the ordinary income rate. Again any return you made in the annuity comes out first and you pay tax on that.

Are Deferred Annuities Beneficial?

This type of annuity is also beneficial in the sense that it works with almost every pocketbook and timeline. Got a large sum of money you’re ready to invest? Great, you can put it all on the table and pay your premium immediately, again up to $1,000,000 (and we do a few per month that are above this number). Rather wait and pay your premium off over time in regular intervals, flexible premiums? That works too. Most annuities start at $10,000 or $25,000.

Yet, while time is on your side in that regard, it might be against it in another. The main drawback to this type of annuity is that you have to wait to access it.

If you make withdrawals before you reach retirement age, you’ll not only pay the income tax on your earnings. You will also be subject to some pretty hefty early withdrawal penalties and surrender charges, some of which could be as high as 20% of your investment when you buy outside of our network. REMEMBER do NOT allow anyone to sell you an annuity that has a surrender charge that is over 9% MAX MAX 10% and the term should not exceed 9 years. Most should be 6-7-8 years.

Immediate Annuities

The other type of annuity is an immediate one.

Contrary to deferred annuities, which have an accumulation period during which you must wait to receive your earnings, immediate annuities start paying out no more than one year after you’ve paid your premium.

While most people choose to invest in deferred annuities when they’re fairly far from retirement age, those closer to that magic number might want to invest in immediate annuities.

This way, they’ll be a shorter window of time between when they make their payment and when they begin receiving their money.

Another advantage to these types of annuity is that they can provide a useful tax break. Here’s the breakdown:

The payments you receive on an immediate annuity are divided into interest and principal.

While the interest is taxed as ordinary income, the principal on these types of annuity remains tax-free, because it is essentially a return on your initial investment. This is known as the exclusion ratio.

Yet, one of the main drawbacks to an immediate annuity? It expires when you do, so the window of time to access it might be narrow depending on when you choose to invest.

Annuity Sub-Sets

Once you’ve decided whether you want to invest in a deferred or immediate annuity, there’s one more step to take. Now you must decide if you want to invest in a Fixed (Traditional), Fixed Indexed (FIA) or Variable Deferred Annuity.

Fixed (Traditional): This type of annuity is essentially a savings account offered by your insurance agency. The agency will use its in-house portfolio to determine the rate at which your money will build interest during the accumulation period. Lock in your interest rate in order to guarantee yourself that rate. That’s the good news. Most fixed products are 3 years to 7 years. The sweet spot as of this post is 5 years.

That same lock-tight security applies to your payments on these types of annuity. The amount you receive is then set. It will not change over the course of your lifetime.

This type of annuity is one of the safest and is advisable for the more risk-averse population, generally those 60 and older.

Fixed Indexed (FIA)

While Fixed Traditional deferred annuities lock you in a certain interest rate, the interest provided under FIA (index annuity) annuities is based on how the stock market performs.

Consequently, your interest rate is determined not by an internal portfolio, but by the performance of an external index. One example is the S&P 500.

While the credited interest is subject to these external conditions, it may fluctuate during the accumulation period, but it will never fall below zero.

Variable

Interest rates are subject to market volatility. A company’s rate lock does not offer security. They could even go way below zero. It is like owning mutual funds. When the market drops 20% your variable annuity will fall even more then 20%.

Such conditions can be risky. Your insurance company will set a minimum payment amount at the onset to ensure that no matter how the market dips and surges, you’ll have a guaranteed payout at the end.

PLEASE REMEMBER the FEES on this type of annuity are 3-5% and have market risk. Most of our clients do not buy this unless they are in their 30’s max 40’s and have 20 years before they retire.

Making the Move: The Right Types of Annuity For You

Not sure if an annuity is right for you? Or maybe you’re sure you want to invest, but you don’t know where to start or who to talk to?

That’s why we’re here. We make it easy to pick the investment plan that best fits your budget, goals, and future dreams.

Learn more about the services we provide, browse our blog for relevant topics, or leave a comment below and let’s start saving!