If you’ve spent any amount of time researching retirement investments, you’re probably well aware of the plethora of options available. There’s no shortage of investment options, asset classes, financial products and more geared toward retirement planning.
However, it can sometimes be difficult to determine whether or not a particular strategy is right for you. Every product seems to have its own list of benefits and considerations. How do you know if those benefits align with your needs and goals?
One commonly used solution in retirement is the deferred annuity. A deferred annuity can be one way to mitigate volatility, reduce tax exposure and even provide guaranteed* income. Not sure whether a deferred annuity is right for you? Ask yourself the questions below to get a better understanding of deferred annuities and to see how they may fit in your retirement income plan.
Do you want to protect yourself from losses?
One of the most attractive aspects of deferred fixed annuities and deferred fixed indexed annuities is they usually offer a high degree of downside protection. In both types of annuities, you have the opportunity to earn interest, but the way the interest is credited can differ between the two.
In a fixed annuity, you usually receive a set interest rate every year. That interest rate is determined before you open the policy and is set for a specific period of time, such as three or six years. When the period ends, the interest rate may be adjusted.
In a fixed indexed annuity, your interest rate can fluctuate based on the performance of an underlying market index, such as the S&P 500. If the index performs better than a pre-set benchmark, you may earn more interest. If the index performs poorly, you may earn little or no interest.
In both cases, there is a guaranteed* minimum interest rate (GMIR), which is the least amount of interest you can receive in any given year. The GMIR is frequently set between 0 and 2 percent.
Since the GMIR is in place, you know what your worst-case performance will be. There’s no reason to fear volatility or downward movement in the market. You’ll have fairly predictable returns and a minimum floor for performance.
Are you looking for tax-deferral?
Deferred annuities are also tax-deferred, much like IRAs and 401(k) plans. That means you don’t have to pay taxes on the growth in your annuity as long as the funds stay in the annuity contract. You pay taxes only when the money is withdrawn from the policy.
The tax-deferral allows you to potentially reduce your tax liability and possibly accelerate the growth of your funds. You should know, though, that like IRAs and 401(k)s, you could face taxes and penalties if you withdraw funds from your annuity before age 59½.
Do you want guaranteed income?
Another feature of deferred annuities is the ability to provide guaranteed* retirement income. There are a couple of ways in which you can access this feature, depending on the type of fixed annuity you own.
For instance, in a fixed annuity, you will know exactly how much interest you’ll earn each year. You can withdraw that interest as income, creating a predictable income stream for yourself without jeopardizing your principal.
Many fixed indexed annuities offer something called a guaranteed* minimum income benefits, which is an optional feature that can provide income for life. With this benefit, you have the ability to withdraw a certain percentage of your contract every year. As long as you stay within the benefit’s withdrawal guidelines, your withdrawal is guaranteed for life, regardless of how your annuity performs.
Annuities can be effective retirement income planning tools, but they’re not for everyone. Some annuities offer limited liquidity, so they may not be a good fit if you need to access the contract in the event of an emergency.
For more information on deferred annuities and other retirement planning tools, contact us at Foote Financial Group. We’ve helped many retirees just like you identify needs, clarify goals and develop a strategy to live a comfortable and enjoyable retirement.
*Guarantees, including optional benefits, are backed by the claims-paying ability of the issuer, and may contain limitations, including surrender charges, which may affect policy values.
This information is designed to provide a general overview with regard to the subject matter covered and is not state specific. The authors, publisher and host are not providing legal, accounting or specific advice for your situation. By providing your information, you give consent to be contacted about the possible sale of an insurance or annuity product. This information has been provided by a Licensed Insurance Professional and does not necessarily represent the views of the presenting insurance professional. The statements and opinions expressed are those of the author and are subject to change at any time. All information is believed to be from reliable sources; however, presenting insurance professional makes no representation as to its completeness or accuracy. This material has been prepared for informational and educational purposes only. It is not intended to provide, and should not be relied upon for, accounting, legal, tax or investment advice.
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