Understanding Annuities
There has never been a better time to invest in your financial future. There is a wide variety of strategies to generate income, protect your assets, and secure your retirement income stream. The cost of living is rising and life expectancy is simultaneously increasing for many adults. You may be wondering how to best create an investment strategy in order to not run out of money during retirement.
People want to make the most of their money but without the chance of losing it all.
That’s where annuity products come in.
What Is An Annuity?
An annuity is a contractual financial product sold by insurance companies. Annuities do two things:
- To help people limit their risk and give them a better return than a CD,
- Or they’re available to help you create a personal pension
Annuities then pay out a stream of payments to the individual at a later point in time.
There are a variety of different annuity products and benefits to each type. As investors seek options to shed risk and guarantee returns, annuities have grown in popularity. With deferred annuities, as well as various subsets, they offer a great balance of protection and reward.
The right annuity products are safe and will help secure your financial future.
How Does An Annuity Help Your Financial Future?
Annuities have changed over the years. While there used to be very limited products to choose from, all that is different now. Annuities can be tied to the performance of stock indexes and offer a wide variety of payout and tax benefits. Most annuities are tied to the S&P 500 but in recent years we have seen a lot of managed volatility indexes used in annuities.
Annuities are recommended as one of the best ways to boost your income when it comes to retirement planning. It is difficult to know how global politics, changing interest rates, real estate transactions and unemployment will affect investment returns. And most of us remember the major impact of the last financial crisis.The financial crisis is estimated to have had a total household wealth impact of over $19 trillion.
With that type of volatility in the market, an annuity is a safer alternative. You can have the benefit of your money growing without the risk of losing any principal. An annuity often guarantees a payout amount that is fixed. This amount can grow based on the performance of the index or stock fund it is tied to. In addition, there are tax benefits that will ease any uncertainty of the total income you can enjoy from your annuity products.
Are There Tax Benefits?
One of the best parts of an annuity is the tax protection it provides. The income payments that you receive can be taxed two ways:
- Exclusion Ratio: If you annuitize the contract, you’ll have an exclusion ratio which will tell you how much is the return of principal and how much is interest on your money (the taxable amount). As an example, $1000 payments may have $900 of return of principle and $100 of interest.
- LIFO (Last In First Out): Think of pouring rocks in a bucket. The last ones you put in are the first ones to come out. This is the same with an annuity with an income rider. You will pay tax on the income that you’ve earned first and then you will go into return of principle, paying nothing in tax for years until the account goes to zero. Once you get into the insurance companies pockets, it becomes 100% taxable again.
When you do begin to make withdrawals, the income will be taxed. The benefit in terms of retirement planning is that you can sleep better at night knowing that your basic needs will be met with annuity payments.
Annuities & Taxation
There are many different ways annuity payouts are taxed. You will want to understand your personal strategy and match that to the type of annuity you invest in.
For instance, you may want a lump sum or deferred payout. How these monies interact with your other investments and social security income will impact your tax liability down the road.
Like all investment strategies, there are winning ways to leverage annuity products in terms of your individual tax situation. A winning strategy can often include using after-tax dollars to fund your annuity. Understanding your tax and income goals will help you pick the right annuity or annuities for you.
There Are Different Types of Annuities
There are many different types of annuities from which to choose.
The two major types of annuities are deferred and immediate.
Deferred Annuities offer major growth opportunities
The upside to deferred annuities is that they help you set your money aside and let it grow. With a specific timeline when payoffs start your money will be growing as interest accrues.
Immediate Annuities start paying out in no more than 1 year
After you start paying your premium, Immediate Annuities go to work right away at generating payouts. They are often the perfect product for individuals who are close to retirement.
Annuity subsets offer variety
In addition, there are subsets of annuities that include Fixed and Fixed Index Annuities. With fair returns and minimal risk, Fixed Index Annuities are one of the most popular investment products.
There Are Two Distinct Phases of An Annuity
Just as there are different types of annuities, there are also different phases of annuities.
When it comes to building your financial future, you need to know the phase you are in personally, as well as the place your annuity can take you.
There is both the accumulation and the distribution phase in any annuity. Making sure you match your financial plans to the performance and structure of a particular annuity will remove any surprises.
Get The Best For Your Financial Future
Tired of low rates? Thinking it might be time to invest in an annuity?
Tennessee Annuity Rates can help.
We offer simple solutions for your situation.
We know that market risk isn’t for everyone. And we also know that everyone’s financial situation is unique.
We will help you find the best products and services for your unique situation. Don’t wait.
Contact Tennessee Annuity Rates now to receive a free consultation and makes the most of your financial future starting today.
