Shopping for a retirement savings plan that meets your specific needs can get tricky – especially with all the options available these days. While many of us have different goals for retirement, having a guaranteed income stream is one thing that everyone can agree on. For this reason, an annuity is a popular savings vehicle for people looking to build a reliable retirement plan.
Annuities have been around for hundreds of years, but many of us still have a lot of questions about how they work. We’re sharing ten essential questions many of us have about annuities to help you decide if this savings vehicle is right for you.
An annuity is a contract with an insurance carrier. Your annuity can cover specific goals, such as principal protection, lifetime income, retirement income, or covering medical care costs later in life. Keep in mind that an annuity is not considered an investment - it’s a contract that can have penalties if broken. However, an annuity can provide an income stream in retirement and it is a good option if you want to deposit money while protecting against stock market volatility.
Although the rate of return is based on the performance of a market index, as the owner of the annuity, you do not own any stocks or bonds in those markets and will never see an interest rate below zero percent (meaning you’ll never lose any of the money that you've put into the annuity).
An annuity is much like any other insurance policy: you pay the insurance company premiums (one lump sum or monthly payments, depending on the type of annuity you choose). The time you are paying premiums is called the accumulation phase where the funds grow tax-deferred during the lifetime of the contract.
Once you’re ready to draw money from your annuity, you "annuitize" the contract and turn it into an income stream, so you receive a payment on a schedule you choose (every month, every year, etc.).
An annuity is more customized to the individual than a standard retirement savings plan. Since you’re able to choose how you want to receive money when you annuitize the contract, you have more control over the payments you receive than you would with a standard 401(k). With a 401(k), you will have to pay a fee if you withdraw money before the designated age – usually age 59.5.
Most people purchase an annuity later in life. This option is popular among people who have already maxed out their 401(k) or IRA, as it provides another tax-sheltered option to save money for retirement.
This option is generally best for individuals who want a guaranteed income stream in retirement but also want a stable option that doesn’t sway with the stock market.
There are several types of annuities on the market today. The two main categories of annuities are immediate and deferred contracts. An immediate annuity offers an immediate payout, and a deferred annuity provides tax-advantaged savings and a deferred payout (so you’ll begin receiving income about ten years into the contract).
Some of the most popular options are fixed and indexed annuities, many of which are designed to build wealth for the owner. Annuities come in many different forms, so it’s important to consult with a licensed insurance professional who can help you choose an option that best meets your financial goals.
Request an Annuity Quote Today
Most deferred annuities have surrender charges if you want to withdraw money early. Some surrender periods are as short as five years, while some contracts have a ten-year surrender period. The surrender charges you face generally decrease with time.
Annuity surrender fees are reduced as time goes by, and in many cases, there won’t be any withdrawal fees after a set number of years into the contract. Qualified annuities will charge the client a penalty if money is withdrawn before age 59.5; however, some annuities will allow penalty free withdrawals up to a certain percent of the accumulated value, each year, before age 59.5.
If you need to withdraw money earlier than expected, it’s best to consult with your insurance agent first.
An income annuity offers guaranteed payment for as long as you live (keep in mind that other types of annuities will only pay out income until the accumulated value is depleted).
One of the biggest perks of an annuity is that there is no cap on how much money you can put into it, so most annuities offer reliability. Contributions are capped for most work-sponsored retirement savings plans, while an annuity allows you to make a one-time payment of your preference or you can deposit money on your schedule.
Annuities are tax-deferred, meaning you don’t have to pay any taxes on the money you’re saving in an annuity until you withdraw funds. Since your annuity generally accumulates money for many years before you withdraw any money, this can offer advantages.
Like a 401(k) or IRA, earnings from an annuity that are withdrawn earlier than the policy terms state can be charged an income tax penalty. For this reason, it’s important to consult with a licensed insurance professional to ensure that you choose an annuity that matches your goals.
Yes, you can add riders to your annuity contract. Like life insurance riders, adding additional terms onto your annuity can provide coverage in the event of the unexpected. Living riders provide benefits while you are alive and allow you to leverage your annuity in different ways.
It’s up to you when you want to start receiving payouts by entering the payout phase. When you reach the payout phase, you stop paying into the annuity and it starts paying you. Payments can be scheduled on a monthly, quarterly or annual basis, or you could receive a lump sum payout. Payments can be started immediately or postponed until a set date.
Some types of annuities allow you to designate a beneficiary to receive the remainder of the payments if you pass away. There is a lot of flexibility when it comes to receiving payouts, so if you have a spouse or designated beneficiary you’d like to receive part of the payout, you’ll want to share this goal with your insurance agent as you are selecting an annuity.
Choosing an annuity guarantees that you have access to a steady source of income during your retirement years. If you are ready to take the next step to reach the retirement you desire, we can help! Your RSF Group can shop from 30 of the top insurance and annuity providers in the industry to help you find the best option for your goals.
With video conferencing available, your RSF Group agent can shop around for you, present your options, and set up your annuity through video conference. You can secure retirement protection all from the comfort of your own home.
Get in touch with a RSF Group agent by requesting a quote for an annuity today!
