Although there are several products and strategies investors can employ to potentially generate retirement income, they may not all offer the predictability of a steady income stream. However, there are products available today that can offer guarantees and income predictability like annuities. Annuities are long term, tax-deferred investment vehicles designed specifically for retirement purposes.
An income annuity provides a steady stream of guaranteed income and can be purchased before or after you retire. The money used to purchase your annuity- which you invest in a lump sum or in a series of payments- generates a stream of income that starts on the future date of your choosing. Each income payment is made up of a return of your premium, interest paid by the insurer, and a component from risk pooling, something offered only by insurance companies. With a deferred income annuity, you purchase a fixed investment vehicle, and you are not investing in or exposed to the equity markets. This means that you will not participate in any market fluctuation or performance. Instead by purchasing a deferred income annuity, you trade liquidity and full access to your money for predictable, uninterrupted income payments guaranteed for life and paid to you by an insurance company.
There a few criticisms of annuities:
- Your money has a surrender period whereby it is locked up for 2 to more than 10 years, depending on the particular product. If an annuitant wishes to receive his monies before this, the surrender fees can start out at 10% or more with the penalty declining over the surrender period.
- Withdrawals made prior to age 59 ½, are subject to a 10% IRS tax penalty and surrender charges may apply.
- Gains from tax-deferred investments are taxable as ordinary income upon withdrawal.
- The investment returns and principal value of the available subaccount portfolios will fluctuate so that the value of your annuity, if redeemed, may be worth more or less than its original value.
- Taking withdrawals beyond the maximum allowable amount under a Guaranteed Lifetime Withdrawal Benefit (GLWB) feature may negatively impact your benefit base level and leave you paying a premium for a feature you’re not using. In order to maximize the strategy, you should be prepared to adhere to the limitations of the feature and have funds outside of the annuity for emergencies or other supplemental needs so as to maximize the benefit that you are paying for.
- All guarantees are subject to the claims- paying ability of the issuing insurance company. If the insurance company becomes insolvent, you could lose all or a portion of your future guarantees depending on coverage provided by your state.
As you can see, there are many variables with annuities that we can help you sort out. We would love to talk with you about how an annuity may fit into your overall investment and retirement strategy.
Investors should consider the investment objectives, risks, charges and expenses of the variable annuity contract and subaccounts carefully before investing. The prospectus contains this and other information about the variable and annuity contract and subaccounts. You can obtain the contract and underlying account prospectuses from your financial representative. Read the prospectuses carefully before you invest.