What is an Annuity and...
Are Annuities Safe?
To answer the question, “Are annuities safe?” we should first explore what an annuity is. An annuity means you place money into an annuity contract with an insurance company. That money then grows for a period of time. After that initial waiting period, the annuity begins a series of fixed payments. In fact, these are usually lifetime payments.
Certain types of annuities are safe, while others carry the same risks as a stock market investment would. Variable annuities, for example, invest directly in the stock market. Therefore, at any point, you could lose your principal if the market goes down. However, fixed annuities and fixed index annuities (FIAs) differ. With these types of annuities, your principal is guaranteed* secure by the issuing annuity insurance company. Regardless of the market fluctuations, your money is safe from market loss inside an FIA.
How Does An Annuity Work?
Both fixed annuities and fixed index annuities (FIA) offer protection of principal as well as a potential rate of return. The difference, however, is that an FIA also offers indexed interest potential. This means that when its related index goes up, you can capture some interest growth. However, if your annuity’s index goes down, you don’t lose your money. On the other hand, a fixed annuity offer a set interest rate, regardless of market conditions. Because it is fixed, the rate is typically lower than what FIA owner’s may receive during an index interest increase.
THE TIMELINES OF AN ANNUITY
There are two timelines associated with an annuity. The first is the time where the money is allowed to grow. This is the accumulation phase. During this time period, you do not take payments or income. Instead, the money grows for a certain number of years. Next, is the distribution phase. As you might have guessed, this is when you can begin taking money out of your annuity. You can do this in the form of lifetime income payments, annual payments, or some other combination. Of course, the details of how you take money out depends upon the specific terms of your annuity.
TIMELINE 1
The time in which your annuity will grow is usually somewhere between 5-10 years. However, some annuities offer terms that are 15 or 20 years for the accumulation stage. No matter the term, this first stage allows your money to grow. After this time is up, you'll be able to take out money if you choose.
TIMELINE 2
The next timeline starts once your waiting period is up. Then, it lasts throughout the rest of your life. Now you may begin taking income payments. You can take payment monthly, annually, or you may decide to simply allow your money to grow. In addition, you may have other choices with your annuity. For example, you could elect to have a guaranteed* income for life. Or, you could choose an income rider that increases your monthly payment amount as costs increase. Beneficiary options exist as well. Be sure to discuss which options may be right for you.
Are Annuities Safe When It Comes to Taxes?
During your accumulation phase, the annuity is not taxable. In fact, you only incur taxes when you take the money out. Because it is not taxable immediately, an annuity offers some interest growth potential. For those looking to hold off on taxes, this may be an option to consider.
Other possible roll-over options exist with an annuity as well. For example, if you have an early retirement with a severance, you may be able to roll your money over into an annuity. If you meet certain conditions, this might be an option. For instance, you must have a 401(k) profit sharing plan as part of your severance. In addition, you must be younger than age 59 1/2. Some possible benefits of a roll-over include the ability to put taxes off until income withdrawal. Be sure to consult with a tax professional for details.
Basically, annuities can offer protection of principal and a lifetime guaranteed* income. If you can hold off on taking income right away, an annuity may be something to consider. Contact us today to learn more about the different types of annuities. We can review your choices and find out what’s right for you.
