Introducing Evertree Mountain States
Contact for Annuities:
Michael Gerali ChFC, CLU
What is an annuity?
Annuities are investment tools designed to generate a consistent income for the owner at some point in the future. They’re common choices for people who come into a large sum of money, like a substantial inheritance, court settlement, or employer payout. Some annuities can be tax-deferred retirement accounts, while others focus on offering early life income streams without the tax benefits. Some annuities even currently yield over 5% interest.
Unlike life insurance, annuities don’t aim to support a beneficiary after the policyholder’s death. Instead, they’re built to aid the policy owner throughout their life.
Essentially, an annuity ensures that the owner’s income stream continues for as long as they live. If you’re entitled to a scheduled sum of money beginning at a certain date, you’ll keep getting that amount until you pass away. Unless you’ve made specific arrangements with the insurer, all payments stop when you die. We’ll delve into these arrangements, known as riders, later on.
To get an annuity, you start with an initial lump sum. This money will be invested, intending to generate future payments back to you. Annuities come in three main forms including: fixed, variable and indexed.
A fixed annuity, as the name suggests, guarantees periodic payments regardless of market activity. This means you won’t gain more if the market does well, but if it tanks, you’re still getting the promised disbursements. Adding more to your fixed annuity can increase your payouts.
Fixed annuities are often seen as appealing, especially for those who already have retirement income that’s subject to market conditions, like a 401(k). The assured income from a fixed annuity allows for riskier, market-dependent investments to be left intact even during market dips.
Variable annuities, on the other hand, base payments on how the investment performs. While this carries more risk, it appeals to those seeking potentially higher returns. However, variable annuities come with larger administrative costs compared to fixed ones.
An indexed annuity is like a variable one but linked to a specific stock market index (like the Dow Jones or S&P 500). Though the index is pre-specified, if it underperforms, your annuity may decrease in value.
Additionally, you’ll need to decide about payment timings and other benefit particulars.
For timing, you can go with immediate or deferred payment.
An immediate payment will begin shortly after your lump sum deposit, which might be suitable if you have a large sum to invest and want timely access to your money. However, once the disbursements kick in, withdrawing the full sum is usually off the table. Moreover, if you die soon after the payments start, your beneficiaries might not receive much (or anything at all).
Deferred payment puts off the disbursements until a set future date, a common choice for retirement planning. We’ll discuss how to protect this investment should an untimely death occur.
If you’re considering an annuity as a retirement investment, you’ll generally need to wait till a certain age (59½ currently, according to the IRS) to receive payments without paying a penalty. Yet, there are exceptions in cases of disability, death or some contract-stipulated long-term care costs. There might also be a surrender fee from the insurer if you tap into the funds before the agreed date.
In terms of annuity timing, you might hear about the “accumulation phase” and “annuity phase”. The accumulation phase spans from the initial investment to when payouts start. The annuitization phase kicks off once you begin receiving your income.
Some insurers offer riders, optional provisions that can enhance or ensure certain benefits. For instance, a death benefit rider might let your beneficiary get part of your annuity if you die before the annuitization phase starts — or even continue receiving payments for a set period after your death. Adding a rider will have a cost. Another example is a cost-of-living rider that adjusts future payout amounts to keep pace with inflation. We’ll discuss long-term care riders next.
Riders specific to variable annuities, for instance, can guard your initial investment – crucial if the stock market slumps. You could stand to lose both potential earnings and the initial capital. There are also death benefit riders available for variable annuities that shield your beneficiary from losses caused by market downturns.
Engage your agent about riders as they can provide significant protection for your investment, especially if you die prematurely or become disabled.
Inclusion In Your Investment Portfolio
A lot of retirement accounts are linked to stock investments and are thus susceptible to market volatility. Fixed annuities can bolster your financial security during unstable or declining markets. However, starting an annuity can be pretty pricey. Consulting your insurance expert about your finances can guide you on how best to allocate your resources.
For example, it might be strategic to roll over some capital from your IRA or 401(k) during a market upswing when your fund’s value is high. If you receive a retention or an early-out bonus, that might be a good source for starting an annuity. The objective is to diversify your retirement savings between market-exposed and guaranteed funds.
Annuities can also offset long-term care costs. Insurers these days often provide fixed annuities with long-term care benefits — though they usually come with a hefty price tag. However, they have some advantages over standard long-term care insurance. For instance, instead of paying regular premiums for a standard long-term care policy, that you forfeit if no claim is ever filed, you invest a one-time, lump-sum in a hybrid annuity package. This can either cover long-term care or provide an agreed-upon regular income.
Annuities can prove to be quite versatile, allowing for various adjustments to make them best fit your comprehensive financial plan. Keep in mind that they require a substantial lump-sum investment, which not everyone might be capable of. Plus, annuities tie up your capital and can levy substantial fees for removing or rolling over funds. Nonetheless, they can be an invaluable addition to your retirement toolkit, providing a balance to other investments tied to the stock market.