Annuities: Are They Right for You?

By George Leamon, CLTC –

Investing in employer-sponsored 401(k) and 403(b) plans are important for your future and security during retirement. Yet, contributions to these plans are limited and may not provide enough income during your golden years, especially if you begin saving later in life. To ensure there is enough income later, an annuity may be a viable option for your retirement financial security.

Annuities 101
According to the U.S. Securities and Exchange Commission, an annuity is a contract between you and the insurance company by which you make a lump sum payment or series of payments. In return, the insurer agrees to make periodic payments beginning immediately or at a set date down the road. Annuities typically offer tax-deferred growth on earnings and may include a death benefit that will pay your beneficiaries a guaranteed minimum amount.

There are three main types of annuities to consider:

  • Fixed: The insurance company guarantees that you will earn a minimum rate of interest during the time that your account is growing. They also guarantee that the periodic payments will remain at an established dollar amount. These periodic payments may last for a defined period of time or for an indefinite period (such as the lifetime of the account).
  • Variable: You choose to invest your purchase payments from various investment options (typically mutual funds). The rate of return of your payments and the amount of the periodic payments that you will eventually receive vary based on the performance of the options that you have selected.
  • Equity-indexed: During the accumulation period, when making a lump sum payment or a series of payments, the insurance company credits you with a return that is based on changes in an equity index. The insurance company typically guarantees a minimum return that can vary. After the accumulation period, the insurance company will make periodic payments to you under the terms of the contract or through a lump sum payment.

Having an annuity offers various benefits:

  • Diversifies your portfolio among a number of assets. Fixed annuities tend to offer an asset class that should not decrease and will eventually increase at a specific rate.
  • Manages your portfolio. In a variable annuity, you will not pay capital gains taxes, so when you eventually withdraw money from your annuity, you will pay tax at an ordinary income rate.
  • Avoids outliving your assets, since annuities pay indefinitely.
  • Protects your assets from creditors. The money that you pay for the annuity belongs to the insurance company so creditors can only access your payments from an immediate annuity as they are made.

Do you need an annuity? Look at your immediate and long-term financial needs to determine if you can afford to open an annuity. Should you have a sudden need for cash, you can usually withdraw a small amount from a deferred annuity without suffering a penalty. However, you will likely suffer a penalty if you withdraw a significant amount of money after only a few years of having an annuity.

George T. Leamon, CLTC – Lutgert Insurance

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