Variable annuities offer the most growth potential, but they also have the risk of market losses and tend to be fee heavy. The other four kinds fall into the fixed column.

Fixed annuities and multi-year guarantee annuities have guaranteed rates for a set period. Fixed index annuities can earn interest based on a market index’s performance, but the growth potential is limited. Immediate annuities start paying you income right away, while with these other fixed-type annuities you usually start income payments some years down the road.

Let’s go back to our overall fixed annuity focus. Most fixed annuities don’t have fees. Fixed index annuities don’t have upfront fees, but some add-ons to a base contract may have fees. It depends on whether you would like those add-on benefits on top of what a base contract gives you.

What about surrender charges and things like that? All annuities are long-term vehicles, and they have maturity periods. If you wish to take advantage of the benefits, then keep your money in the annuity until it matures. Otherwise, there might be a surrender charge. It’s a way for the insurance company to manage risk and keep its promises to you and many other customers.

In this article, we will go over why fixed annuities don’t have fees and how they work.

The Nature of Fixed Annuities

Unlike variable annuities, where you gain or lose money depending on what the market does, fixed annuities protect your money. That is why they are called “fixed.” They promise benefits like protecting your principal and providing lifetime income. Your fixed annuity can also let your money grow with a guaranteed interest rate for a set period.

Of course, these benefits come with some trade-offs. It’s good to understand them so that you have a solid idea of what your options look like with fixed annuities.

Costs Built into the Fixed Annuity Contract Design

Most fixed annuities have costs designed into the contract. These costs aren’t separate fees you pay every month. Nor are they explicit or direct fees. Instead, they are built into the annuity itself. For example, there will be limits on the growth potential of your money in exchange for those annuity benefits.

You might be wondering about how your financial professional is paid with annuities – and if there are any fees that affect you. The good news is that with fixed annuities, the payment isn’t taken from your annuity premium. Rather, it comes from the insurance company’s coffers, so 100% of the money you put into your fixed annuity goes to work for you from day one.

So, there aren’t fees tied to the payment of your financial professional that will affect the benefits that you will receive from your fixed annuity.

What About Annuity Surrender Charges?

On their face, surrender charges seem like a bad thing. But they are actually neutral. A surrender charge is simply a means for an insurance company to keep its contractual promises to you and hundreds of thousands of other contract holders.

An annuity is a long-term commitment. To support its obligations over that period, the insurance company puts the annuity premium money into long-term investments, such as bonds. If someone decides to exit the contract early, that will disrupt the schedule of those underlying investments – and the insurance company’s ability to meet its promises.

If an example from history would help, think about the bank runs of the Great Depression. At the time, people worried about having enough money to pay for their household expenses. Huge crowds flocked to banks to withdraw their deposits. It created a huge, sudden run on deposit funds that overwhelmed the banks. And the banks couldn’t keep up.

Now, let’s go back to annuities. Life insurance companies are in the business of managing risk well. People rely upon insurance companies for financial security and protection. What’s more, those assurances are for the long haul. While it’s not likely to happen, a massive run on annuity monies would greatly stress the ability of the life insurance company to meet its long-term obligations.  

Surrender charges are an economic incentive for annuity owners not to exit their contracts before they have matured. In turn, the life insurance company can make good on its promises to you and uphold those annuity benefits.

If surrender charges are still a concern, talk to your financial professional about early surrender charges in any annuities you are considering.

What Influences Annuity Pricing?

We talked about how fixed annuities have costs baked into their contract design. What sorts of things play into annuity pricing? At a high level, here are a few factors:

• Bond yields – the majority of fixed annuity premiums are put into bonds and other low-risk, long-term investments
• Annuity premiums – insurance companies take the gross amount of premium they collect in a year and use that in their budgeting decisions. The more money, the better the guarantees they can offer.
• Mortality rates – Insurance companies pay attention to mortality data. When mortality rates are on the rise, for instance, the insurer’s financial obligations decrease, because there are fewer people to receive annuity payments. They price those trends into their annuity products.
• Overhead expenses – Just like with any other business, insurance companies have overhead expenses to meet. They factor those into their annuity product pricing.
• Cash reserves – The amount of cash reserves that a life insurance company has matters. Companies with larger reserves can offer more competitive annuity products and benefits. They also tend to be more established.

Annuity Riders and Fees

Let’s say that you have a fixed annuity or a fixed index annuity. The base contract has some nice benefits, but you want more than what the base contract offers.

In that case, you might be interested in annuities with “riders” – extra benefits that you can add to your base annuity contract. While the annuity itself might not have fees, the riders often do.

For example, a fixed index annuity might offer an “income rider” that will pay you lifetime withdrawals and, at the same time, some annuity money access if you need it. That rider might cost 0.95% per year. Adding more riders might mean more fees.

Talk to your financial professional about any rider benefits, what fees they might charge, and what (if anything) might make sense for you.

Looking for the Right Annuity?

Annuities offer great value with their contractual guarantees, but sometimes they can be complex. Fixed annuities don’t come with fees, while variable annuities do. If you want add-on benefits to your fixed-type annuity, it usually comes with a fee. So, any rider benefits need to make sense for your financial situation.

Above all, the right annuity needs to solve a clear problem or gap in your financial plan. Do you need more monthly assured income? Do you need to protect a certain amount of your nest egg from market risk? Want to leave a minimum death benefit for your loved ones? Need funds for long-term care?

Annuities can help problem-solve in these situations and others with their guarantees. But you need the right one for your needs. An experienced and independent financial professional can help you walk through your retirement what-ifs, zero in on what matters, and lay out a course of action to follow. They can also explain why certain annuities might fit your personal circumstances.

If you are looking for someone to help you, many independent and knowledgeable financial professionals are available here at SafeMoney.com. Use our “Find a Financial Professional” section to connect with someone directly and discuss your situation. You can request an initial appointment to get your questions answered. If you want a personal referral, please call us at 877.476.9723.

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On the other hand, a surrender charge can be a hold-up for someone who might otherwise be interested in an annuity for its guaranteed benefits. Annuities are contracts between someone and a life insurance company.

They are a long-term commitment, and if someone wanted to take out more money than is permitted or exit the contract prematurely, a surrender charge would apply. Of course, surrender charges also help insurance companies maintain their long-term promises to policyholders as well.

So, are annuity surrender charges good, bad, or indifferent? How do they work, and in what specific ways do they work for you? Are there other upsides to annuity surrender charges beyond the obvious benefit of helping the life insurance company?

The truth is, they are more of a necessary feature than a judgment of goodness or badness. In some respects, you can say they are a neutral thing. Let’s break them down into some simpler terms.

What Are Annuity Surrender Charges?

Let’s start with the basics of an annuity. At its most basic, an annuity is a contract between a person and a life insurance company. Now, imagine that you start an annuity with a premium payment to the insurance company. In exchange, the insurance company makes certain contractual promises to you, the contract holder.

Those guarantees can span a number of benefits. The most common is that the insurance company will make regular payments to you over time, including for the rest of your lifetime.

In some annuities, those payouts can start right away. With others, your payments will begin at a later point, often years from when you started the annuity. If you need some liquidity between your annuity contract start date and when you actually turn on your annuity payments, a variety of annuity types let you have some money access via free withdrawals. In other words, you can take out up to a certain percentage of your annuity account value without penalty.

But here is the trade-off for those guarantees: If you decide to take out too much money or exit the contract, you will pay a penalty. That penalty from the insurance company is called a surrender charge.

How Do Annuity Surrender Charges Work?

Annuities have time periods over which they mature. This period can span from 2-14 years. Many annuities have maturity periods of 10 years or less.

During that window, if you take out more money than permitted in a free withdrawal or pull out of the contract before it matures, a surrender charge kicks in. It’s why this period is also called the “surrender period.”

When you are in the surrender period, a schedule of surrender charges applies. They are percentage-based. How much they cost will vary depending on the contract, but typical surrender charges range from 7-10%. Normally they cost a percentage of what you take out of the contract (again, above the permitted withdrawal amounts or cashing the entire contract out).

Most annuity contracts come with a schedule of declining surrender charges over the maturity period. For instance, in year 1, the surrender charge may be 10%. Then it goes down to:

• 9% in year 2
• 8% in year 3
• 7% in year 4
• 6% in year 5
• 5% in year 6, and so on

Surrender Charges Are Neutral, Not Good or Bad

If retirement planning was storytelling, surrender charges wouldn’t be heroes or evil villains. Instead, they are more like rules in a game. Why? Because they help the life insurance company keep its promises to everyone who owns annuities.

With a typical life insurance company, that can be hundreds of thousands of people – or more. The insurer is also managing risks tied to paying steady income streams to these contract holders for as long as they need it or might live. Talk about a lot to take on.

The surrender charge is one way for them to ensure that contract holders stick to that long-term commitment.

Financial Safeguard for Meeting Long-Term Promises

When an insurance company starts an annuity contract with someone, they take the premium dollars and put them into underlying investments so that they can support their promises to the annuity owner. The bulk of the premium money goes in low-risk, long-term investments, such as bonds.

Life insurance companies must maintain dollar-for-dollar reserves for each dollar of fixed-type annuity premium that they gather. The surrender charge schedule also helps insurers maintain their investment timelines and keep up their financial strength. In turn, it lets them meet decades-long promises for many households.

In that way, surrender charges are a kind of “financial safeguard.” If you think about the bank runs of the Great Depression, it also helps prevent runs on insurance companies for annuity premiums. That would otherwise really upset their ability to manage long-lasting promises to contract holders!

Surrender Charges, Snacks, and Cakes… Oh My!

Here is another way to think about this. Owning an annuity isn’t like grabbing a snack. It’s more like putting some elbow grease into a big, delicious cake that takes time to bake.

That cake is your retirement fund. Hopefully it’s part of an overall mix of financial assets that you have for retirement. When you buy an annuity, you are essentially saying, “I’m in this for the long haul.” Once you are retired, you can start serving yourself some of that delicious cake.

The surrender charge encourages you to keep your money in the annuity until it’s fully baked and ready for you to enjoy during retirement. If you take out your money too early, you might have to pay a surrender charge fee. It’s like taking a slice of the cake before it’s finished – perhaps not the best idea.

Are the Trade-Offs Worth It?

The most important question: Is the waiting period during which surrender charges apply worth it for the annuity benefits?

Everyone’s take will be different, and no two people will have the same situation. Nonetheless, many retirees seem to be happy with what they get from their annuity contracts, as a couple of surveys indicate.

In one survey by LIMRA, an insurance industry organization, 900 annuity owners were asked about what factors were most important to them in buying an annuity. Twenty-five percent said that having a guaranteed lifetime income feature with some money access, even as they paid an extra fee for the benefit, was the biggest deciding factor.

In other words, they were okay with the benefit fee, and any possible surrender charge, because of what they got with the lifetime income feature. The annuity’s growth potential, the guarantee of principal protection, and an ability to annuitize for a lifetime income stream were other reasons that were named as primary drivers.

Annuity Owners Happy with What They Get

In a December 2013 survey by Genworth, 78% of annuity owners said that they were happy with the level of access they had to their annuity money. 70% said that their annuity fees were justified by the annuity benefits they received.

In that same survey, 61% of annuity shoppers were willing to pay extra fees for the assurance of asset protection in down markets and growth potential in up markets.

In other words, surrender charges may not be a deal-breaker for those wanting long-lasting financial security. The guarantees of annuities are too appealing to pass up.

Decoding Annuities, Surrender Charges and All

Before you jump into an annuity contract, make sure you understand the terms and conditions. When you are chatting with the financial professional who suggested an annuity to you, ask them about surrender charges.

A good agent or financial advisor will explain them clearly, so you know what you are getting into. They should also be able to cover why a particular annuity is a good fit for your needs, goals, and financial situation. Above all, that annuity needs to cover specific gaps in your financial plan or solve a certain problem. It’s the foundation of your overall strategy.

Understanding the surrender charge – and other annuity features, pros, and cons – will help you with making well-informed choices. It’s not about good or bad. It’s about being aware and making decisions that serve you well in your long-term goals.

If you need help in exploring an annuity for your retirement plan, or you would like some assistance in working through your retirement questions, an experienced financial professional can assist you. Should you be looking for someone to guide you, many independent financial professionals are available here at SafeMoney.com. Top of Form

You can use our “Find a Financial Professional” section to connect with someone directly. You can request an initial appointment to discuss your goals, needs, and situation and explore a potential working relationship. Should you need a personal referral, please call us at 877.476.9723.

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When you start an annuity, you own a ‘money for life’ contract between you and a life insurance company. The insurer promises to give you regular payments for a set period or the rest of your life. Insurance companies have a strong record of meeting these commitments in all sorts of economic conditions and stock market cycles.

Annuities come in a variety of flavors. Some annuities are just base contracts, while other annuities offer add-on benefits that offer a lifetime income stream and liquidity. In other words, you have many choices and ways to customize an annuity to your personal goals, needs, and financial situation. It’s a matter of finding the right annuity for you.

In this article, we will go over the pros and cons of annuities for retirement income. As a guaranteed income source, annuities are a great way to maximize your money, but they aren’t for everyone. We will also talk about situations in which they can really make a difference.

What Kinds of Annuities Are There?

Before getting more into the pros and cons of annuities, it helps to cover their basics. There are five basic types of annuities: immediate annuities, fixed annuities, multi-year guarantee annuities, and variable annuities.

Immediate annuities start paying you income right away. The four other types of annuities tend to fall into the deferred annuity camp, which means you wait for a certain period before you start your annuity income stream.

Fixed annuities give you a guaranteed rate of growth for a set time. For example, your fixed annuity may pay a 4% rate for two years, then a new guaranteed rate is issued. Multi-year guarantee annuities (MYGAs) work the same way, but they guarantee the interest rate for a longer period. For example, a MYGA may pay 5% per year for five years, and that is the length of your annuity commitment.

Variable annuities let you invest your money in subaccounts, or underlying accounts that resemble mutual funds. Your money is actually invested in financial markets. In this way, variable annuities offer the most growth potential of all annuity types, but they also have the greatest market risk. You can lose money in a variable annuity due to market losses.

A fixed index annuity earns interest that is tied to an underlying benchmark index, but this growth potential isn’t guaranteed. However, a fixed index annuity does guarantee the protection of your principal, or original money with which you started your annuity contract. Over time, the annuity tends to earn more interest than a fixed annuity or a MYGA would earn, as the index-linked gains add up. The growth potential of a fixed index annuity is capped in exchange for that benefit of principal protection.

All of these annuities can pay you a guaranteed income for life. Some annuity types come with an add-on benefit, called a rider, that pays you lifetime payouts and still lets you have some access to your money. Other riders may give other benefits. Riders almost always come at an additional fee, and they can be ideal for those wanting more flexibility in their annuity.

The Pros of Annuities for Retirement Income

What sort of advantages can an annuity provide for retirement income? Here are a few ways in which it stands out.

Steady Stream of Income

Annuities are best known for their ability to provide a reliable income stream for life. They are the only thing on the planet besides Social Security that can ensure you receive a steady paycheck, no matter what the market does.

That can bring great peace of mind during retirement. And the means that insurance companies use to manage these obligations of ongoing payments have historically held up well.

Protection Against Longevity Risk

The greatest fear that people have is outliving their money. It’s an understandable concern. The Nobel-winning economist, William Sharpe has called the risk of running out of income the “nastiest, hardest problem in finance.”

With their promise of lifetime income, annuities guard against the uncertainty of living longer than expected (and depleting your funds to zero). That can be a nice benefit when people are living longer with wellness, healthcare, and technology. Among those who are in excellent health and non-smokers, women have almost a one in three chance of living to age 95 or beyond. For people of the same category, men have an almost one in five chance that they will live to 95 or beyond.

As the average lifespan goes up, the ability to shield yourself from this longevity risk with an annuity can be quite attractive. You won’t outlive your savings, and the insurance company is on the hook to keep paying you income for as long as you live.

Guard Against Market Risk

One of the greater risks as you near saying “sayonara” to your career is being in the “retirement risk zone.” This is the period of just a few years before retirement and in early retirement. When you fall into that timespan, investment losses can greatly affect your financial security. If your portfolio takes a hard hit, those losses can add up even more should you already be taking money out of your retirement accounts for income.

Annuities safeguard you against this risk of untimely losses with their guarantee of principal protection.

Diverse Options for Payouts

Annuities come in various shapes and sizes. That gives retirees the ability to customize their annuity according to how they would like to receive payments.

You can turn your annuity money into an income stream that pays you for the rest of your life. This is called annuitization, and one downside is that you can’t reverse the income stream. If you want some liquidity, you can opt for an annuity with an income rider that lets you receive lifetime withdrawals, but the rider will come with a fee.

Your payout options are also flexible. You can choose a joint life payout option that continues payments to your spouse once you are no longer here. Should you want to maximize income during your lifetime, you may go for a single life payout (and provide for your spouse via other features of the annuity).

Say that you don’t need the income for the rest of your life. Your payout options include payment durations for a set amount of years (5-20 years). You can also choose a payout option that has a set schedule and if you pass away early, the payments will continue to your spouse for the remaining span.

On the rider side, you can have fixed payout options, or some riders offer increasing income options, in which your payments grow in various ways. Talk to your financial professional about these payout options and what might make sense for your situation.

The Cons of Annuities for Retirement Income

While annuities are a leader for guaranteed lifetime income, they also have downsides. Here are some trade-offs to keep in mind if you want to explore the complete picture of using an annuity for retirement income.

Complex Products

Annuities can be fairly complicated, and it also depends largely on the type of annuity you are looking at. Some annuities are simple, such as an immediate annuity. Others may have benefits that you would like, such as some access to your money. Fixed index annuities let you have this access by permitting free withdrawals and providing guaranteed lifetime payments via an income rider. But there are lots of moving parts, and the income rider typically comes with a fee.

This may be a turnoff for those looking for simple financial solutions (but who might otherwise benefit from the guaranteed income). It can also take more time for a financial professional to cover more complex options, so that you know what you are getting. Don’t be afraid to ask questions until you are comfortable.

Less Liquidity Than What Other Options Offer

Annuities pay a steady income stream, but they do have less liquidity than other financial instruments. With many investment options, you can sell off assets so that you have liquid funds if you need them. Several savings options may present more liquidity than annuities in general. That is the trade-off that you get for an annuity with its steady, unchanging income stream in market conditions and economic conditions that are good and bad.

That being said, many annuities let you have some money access with free withdrawals. In other words, you can take out up to 10% of your annuity’s contract value each year. Perhaps keep this feature in mind if it’s important for you to have an annuity that will give you some liquidity.

Talk to your financial professional about what else you can use for sources of liquidity, and how you can include them in your overall retirement plan. Your needs for income and liquidity shouldn’t have to conflict with each other.

Annuity Fees and Expenses

Many annuities don’t have any fees or expenses. But not all fall into this camp. Variable annuities tend to have lots of fees and expenses, including administrative fees, mortality and expense charges, rider fees, and fees tied to the subaccounts in which you can invest money.

Fixed index annuities offer add-on benefits in the form of riders: lifetime payments with some money access, enhanced liquidity with free withdrawals, a bigger payout for heirs once you are no longer here, and more. However, these riders often charge an annual fee. The more bells and whistles that you have on your annuity for add-on benefits, the more that you might be paying in rider fees.

Ask your financial professional about the rider options with your annuity, what they do and don’t do, and how much they cost. If a rider benefit doesn’t solve a specific problem in your financial plan, it might be too much. The same goes for having too many riders tacked on to your annuity contract. You should have these details explained well to you before you make a decision.

Inflation Risk

Guaranteed payments from an annuity may not keep pace with inflation. Especially high inflation. When they turn on income, many annuity owners opt for level payments from their annuity. These payments are fixed, meaning they won’t change over the years. The upside is that they are guaranteed to last for as long as the annuity owner lives.

Over time, inflation eats into money’s purchasing power. If you are receiving fixed payments from your annuity, those payments may be eroded by inflation. Some annuities have increasing-income or inflation-adjusting payout options that can help you keep up with a rising cost of living. Of course, those options have their own nuances as well as pros and cons.

Talk to your financial professional about how you can have other assets in your retirement portfolio that have strong growth potential (and therefore the ability to keep up with inflation). Your annuity income can provide you with a baseline income stream. Then you can use your other retirement assets to help make up for inflation as needed.

Some Final Thoughts on Pros and Cons of Annuities for Retirement Income

Using an annuity for retirement income can be very beneficial. Annuities are the only financial vehicle that can pay you a guaranteed income stream for life. The fact that nothing else can do this is an indicator of what an annuity can do for financial peace of mind.

However, just with anything, there are pros and cons to annuities. The bottom line is that an annuity should be part of your overall retirement income strategy, and it needs to fill an income gap or solve a clear problem in your existing financial plan.

As you weigh the pros and cons, it’s important for an annuity to be tailored to your personal financial situation and retirement goals. Seeking out an experienced and independent financial professional who knows retirement, annuities, and how they tie together can help you in your decision-making process. They can help you explore different options, find annuities that fit your needs well, and determine what is best (if at all) for helping you enjoy a stable and fulfilling retirement.

If you are looking for an independent financial professional to assist you, many are available here at SafeMoney.com. You can connect with someone directly by visiting our “Find a Financial Professional” section and requesting a complimentary appointment. If you would prefer a personal referral, please call us at 877.476.9723.

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Technically, you may be able to buy an annuity for even a child. However, most annuity purchases are with retirement money, especially IRA money. So, annuities tend to be more appropriate for people of near-retirement and retirement age. You will also see retirement savers in their 30s and 40s purchasing annuities for principal protection, safe growth, or tax-deferred accumulation in another place alongside retirement accounts. Overall, annuity buyers tend to range from ages 40-80, depending on their needs and goals.  

In an old survey by Gallup of individual annuity owners, the average age for first-time annuity buyers was 51. The survey found the median age of first-time contract owners to be 52.

Since age limits can vary among annuity types, let’s take a look at those now.

Different Annuity Types and Age Restrictions

Generally age restrictions arise with three kinds of fixed-type annuities: immediate annuities, fixed index annuities, and multi-year guarantee annuities. Here’s a quick look at each type and some potential restrictions:

Immediate Annuities

With an immediate annuity, someone pays a one-time lump sum, or a single premium. In exchange, the insurance carrier promises them a guaranteed fixed income for the rest of their lifetime. The lump sum is “annuitized,” or converted in a steady stream of payments over time. Depending on the selected payout option, this income can continue for a certain period even after the contract holder deceases.

Some insurance companies will let you purchase an immediate annuity up until age 100. Many immediate annuity buyers fall into the 70s age bracket. The older someone is when they purchase an immediate annuity, the bigger the monthly payout they will receive from the insurance company. This is because at that point, the payout is based more on actuarial estimates of life expectancy. Note, however, once annuitized, those annuity payments can’t be changed back into a lump-sum balance.

Fixed Index Annuities

Age limits vary in the fixed index annuity market. Some insurance companies let you buy a fixed index annuity up to age 75. Other carriers cap the buying age limit at 85. Overall, the average age limit tends to be around age 80. If someone is age 70 or over, a fixed index annuity should be especially tailored to the buyer’s individual needs, especially if the annuity has an income rider. Interestingly, many insurance carriers actually won’t let you buy an annuity with an income rider until you are age 50 or above.

Unlike immediate annuities, fixed index annuities have a deferral period. During this time, the contract earns interest based on movements in an index, like the S&P 500 price index. The insurance company credits your contract with earned interest, you actually don’t participate in index changes. When the index goes down, your principal and earned interest stay intact.

Note, if you take withdrawals from the contract before age 59.5, you will pay income taxes as well as a 10% early withdrawal penalty. You may also have to pay another penalty if your withdrawals exceed contractually permitted amounts during the deferral period. Most fixed index annuity contracts allow for withdrawals of up to 10% of your contract value. So, it’s prudent to be careful with contract withdrawals.

Multi-Year Guarantee Annuities

Multi-year guarantee annuities (MYGAs) are also known as “fixed-rate annuities.” In this type of contract, you usually pay a single premium or lump sum to the insurance company. In exchange, the insurance company guarantees your money will earn compound interest over a set period of time. That period tends to last for many years.

You generally have the ability to purchase a multi-year guarantee annuity until age 85. Some carriers may permit MYGA purchases even beyond that. But since it involves a drawn-out accumulation phase, this type of annuity may not be appropriate for purchases at older age. Like with other deferred annuities, many purchasers of multi-year-guarantee annuities are in their 50s-70s. If you’d like to see if this annuity type, or for that matter other annuity options, may be right for you, a qualified financial professional can help you explore your options.

What Times are Right for Annuity Purchases?

So, what’s the best age to buy an annuity? It depends. Many people get annuities for reasons tied to safety. Others purchase them for guaranteed income, whether for a set period or the rest of a lifetime. And yet some are attracted to annuities for other reasons, such as enjoying another tax-deferred “bucket” to build up retirement money alongside retirement accounts.

While no one-size-fits-all answer applies, the majority of annuity buyers are in their 50s, 60s, and 70s. Some reasons for why different age groups buy include:

• Buyers in their 30s and 40s often are especially risk-averse and want a safe vehicle for growing their savings. They may use annuities as another growth vehicle alongside tax-advantaged retirement accounts and investment brokerage accounts.
• Buyers in their 50s and 60s may buy for a variety of reasons. Many contract holders understand that retirement is nearing, and so they are seeking safe places to preserve money for retirement. Others are attracted to the guaranteed income and get into deferred contracts that will give them the lifetime income they need. Others just want a safe growth vehicle before they use their money for income in years ahead.
• Buyers in their 70s tend to buy annuities for income reasons. Occasionally, just like in age brackets, you’ll see purchases for other goals. But income certainty and lifelong income security tend to be driving buyer rationales in this age bracket.

No matter what, any annuity strategy should be individually tailored to your financial picture. It should make sense for your needs, goals, circumstances, liquidity requirements, and other objectives. A financial professional can help you evaluate your financial picture and explore annuity options that help you achieve financial security.

Ready for Personal Attention?

If you are ready, financial professionals at SafeMoney.com can help you.

Use our “Find a Financial Professional” section to connect with someone directly. And call us at 877.476.9723 if you need a personal referral.

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Of course, if you are considering a fixed annuity as part of your financial plan, you may wonder about the risks tied to owning one. After all, annuities are supposed to be a tool for managing risk, right? Who assumes the investment risk with a fixed annuity contract?

In this article, we will cover this question in depth, but here is a quick answer. The life insurance company standing behind the fixed annuity contract bears the investment risk. The insurer pools this risk across thousands of annuity contract holders, including you, and manages this risk in a variety of ways so that it can make good on its promises to you and everyone else. Life insurance companies have a strong record of fulfilling their contractual promises in good and bad economic times.

Before we take a deeper dive into fixed annuities and how insurance companies stand behind the investment risk of upholding them, let’s delve more into fixed annuities and what they involve.

Understanding Fixed Annuities

Here are the quick basics of how a fixed annuity works. Think of it as a contract that a life insurance company makes with you.

In exchange for certain assurances from the life insurance company, you give the insurer a lump sum of money. The insurance company usually promises to give you a series of payments later on, often during your retirement. You can receive this stream of payments for a certain timespan or for the rest of your life.

Now, all types of annuities can pay a guaranteed income stream, but fixed-type annuities stand out for other reasons. Fixed-type annuities are called “fixed” because of how the life insurance company guarantees that your principal won’t be lost regardless of how the stock market or other market conditions perform.   

Fixed-type annuities include traditional fixed annuities, multi-year guarantee annuities (MYGAs), and fixed index annuities. With traditional fixed annuities and MYGAs, the insurance company promises to pay you a set amount of interest on your money over a certain time period. So, for example, if you had a MYGA with a 3-year term and a guaranteed 3% rate, your money would grow at three percent annually over the term.

With a fixed index annuity, the growth isn’t guaranteed. Instead, your money can earn interest that is based on the movements of an underlying financial benchmark index, such as the S&P 500 index. Over time, money inside a fixed index annuity may earn more interest than it would inside a fixed or MYGA annuity.

Fixed index annuities do include an option for an annual, guaranteed fixed rate, but most people buy these annuities for the interest-earning potential tied to an index or for other specific benefits, such as an income rider.

The biggest benefit of a fixed annuity is you will know exactly what you will get, how much you will get, and when you will get it.

The Insurance Company Assumes the Investment Risk

The great news for fixed annuity owners is that the investment risk falls on the insurance company, not on your shoulders. That being said, keep in mind that your annuity guarantees depend on the insurance company’s ability to meet those obligations. In industry-speak, we call this the financial strength and the ability of the insurance company to pay its claims. You can tell more about this from a life insurance company rating, among other things.

Now, here is more on why the investment risk of a fixed annuity contract falls on the insurance company.

Guaranteed Growth in Good and Bad Times

Remember how we mentioned that your money has guaranteed growth with a plain-vanilla fixed annuity or MYGA annuity? Well, the key here is that the insurance company offers you a fixed interest rate. This means they promise to pay you a specific amount of interest on your money, and they can’t change it once the contract is in place.

This fixed interest rate is like a safety net for you. Even if the economy takes a nosedive or financial markets go through a rollercoaster ride, your interest rate is guaranteed by the insurance company to remain the same. And again, it’s not completely foolproof, but insurance companies have a very strong record of delivering on their promises in good and tough economic times.

Guaranteed Income

During the annuity payout phase – or when you turn on those regular income payments – the insurance company also guarantees that you will receive the promised payout amount. This guarantee can bring much peace of mind because, once again, you don’t have to worry about market ups and downs affecting your income.

Managing Market Risks

Now, you might wonder, “What about the insurance company? How do they manage the investment risk?” Well, insurance companies are skilled experts in this area.

They take a long-term view of the risk and their management of it. They support their annuity obligations by investing your money in underlying investments that help them cover their promises to you while still making a profit.

Most of the cents in every dollar of fixed annuity premium are put into government bonds, securities, corporate bonds, and other stable assets, which are considered less volatile than stocks. This way, the insurance company can ensure they have enough money to make those ongoing payments to you, regardless of how the stock market behaves.

Benefits and Limits of Fixed Annuities

So, the insurance company holds the investment risk with a fixed annuity contract. That makes sense, as annuities are transfer-of-risk plays.

But what could having a fixed annuity mean for you as the annuity owner? Let’s now look at the benefits and limits of a fixed annuity.

Benefits of a Fixed-Type Annuity

• Steady Income: Fixed annuities provide a reliable source of income during your retirement years.
• Predictable Stream of Money: With the annuity, you know exactly how much money you will receive, making income planning for retirement easier.
• Lower Risk: Since the insurance company takes on the investment risk, you can enjoy a higher sense of financial security.
• Tax Advantages: Some fixed annuities offer tax-deferred growth, meaning you don’t pay taxes on the interest you earn until you withdraw the money.

Limits of a Fixed-Type Annuity

• Lack of Flexibility: Fixed annuities aren’t very flexible. Once you commit your money, it’s challenging to access it without penalties.
• Inflation Concerns: Most fixed-type annuities pay fixed amounts, which might not keep pace with inflation, potentially reducing your purchasing power over time.
• Annuity Fees: Traditional and MYGA annuities don’t really come with fees, but some fixed index annuities do, depending on what add-on benefits they offer, among other things. As a long-term vehicle, annuities also come with surrender charges for early, excessive withdrawals or contract exits. Talk to your financial professional and make sure that you understand everything involved.
• Limited Growth Potential: While fixed annuities offer stability, they might not provide the same level of growth potential as investments or instruments of greater risk.

Consider Your Financial Goals

A fixed annuity contract can be a helpful foundation as part of your overall retirement financial plan. Before committing to a fixed annuity, it’s essential to consider your financial goals and needs. What do those look like, and how will the annuity help solve gaps in your current plan?

To work through this, here are a few questions to ask yourself:

1. What are your retirement goals? Do you want a reliable source of income during retirement, or are you looking for more growth potential?
2. How risk-averse are you? Are you comfortable with market ups and downs, or do you prefer a stable, low-risk investment? What is your risk capacity, or the maximum amount of risk, mathematically speaking, that your investments can take before they are unable to recover?
3. What are the fees and terms? Make sure you understand any fees associated with the annuity contract and the terms of the contract.
4. Is inflation a concern? Consider how your annuity interest earnings and fixed payouts will keep up with inflation over the long run. How will the rest of your financial plan help your income keep up?
5. Do you have other retirement savings? Think about how fixed annuities fit into your overall retirement savings strategy. They can be a valuable part of a diversified retirement plan.

The Bottom Line on Fixed Annuity Contracts and Investment Risk

In a fixed annuity contract, the investment risk falls mainly on the insurance company, not on the individual annuity owner. This can help people have a sense of security and predictability, making fixed annuities an attractive option for those seeking a reliable source of income during retirement.

However, it’s essential to weigh the benefits and limits of fixed annuities against your financial goals and risk tolerance. Just as with any financial decision, having a fixed annuity contract should be part of a well-thought-out retirement plan. The annuity needs to solve a clear problem in your plan, and it needs to line up with your needs, goals, risk tolerance, and financial situation.

Talk to your financial professional for more information on fixed-type annuities, what they can offer, and your current progress in retirement planning. If you are looking for a financial professional to help you, many independent and experienced financial professionals can assist you here at SafeMoney.com.

Use our “Find a Financial Professional” section to connect with someone and get started with a complimentary, initial discussion. You can talk about your goals, concerns, and situation and explore a potential working relationship. If you want a personal referral to someone, please call us at 877.476.9723.

The post Who Holds the Investment Risk with a Fixed Annuity Contract? first appeared on SafeMoney.com.

The reasons are different for everybody. But one short answer is because annuities can provide more financial peace of mind with their contractual guarantees, backed by the life insurance company.

Annuities have grown in popularity, as people can use them to supplement their Social Security payouts, have a guaranteed lifetime income stream, earn interest on their money, protect their assets against market losses, and enjoy tax-advantaged financial growth. Paying for long-term care, offsetting inflation, and shielding assets from probate and creditors are a few other reasons as well.

In this article, we will delve into reasons behind why people buy annuities and how these guaranteed financial vehicles can contribute to a well-rounded financial strategy.

Eight Reasons Why People Buy Annuities

Here are the major reasons why people buy annuities for their retirement planning strategy. Of course, they are just a few of many motivations for annuity contract ownership.

1. Supplementing Social Security

This is one of the biggest reasons why people own annuities, as many surveys report. While it provides a basis for retirement income, Social Security often falls short of covering all monthly living expenses. Retirees need additional sources of income to keep up their desired lifestyle, especially as life expectancy in retirement goes up.

Annuities bridge this income gap by offering a steady stream of payments that can complement Social Security benefits. This extra income not only helps cover monthly expenses for your lifestyle, but also provides peace of mind by providing you with ongoing, predictable income payouts each month.

2. Guaranteed Lifetime Income Stream

One of the most compelling reasons individuals purchase annuities is the promise of a guaranteed lifetime income. An annuity essentially works as a contract between someone and an insurance company.

In exchange for a lump-sum premium or a series of premium payments, the insurance company agrees to provide regular payouts for the rest of the individual’s life. This predictable income stream is invaluable, as it ensures that retirees won’t outlive their savings, regardless of equity market swings or economic downturns.

The guarantees depend on the insurance company’s ability to stand behind them. That being said, life insurance companies have a solid track record of delivering on those promises in all sorts of economic conditions.

3. Tax Advantages

Annuities offer distinct tax advantages that make them an attractive option for retirement saving alongside retirement accounts. During the accumulation phase (or our working years), the earnings within an annuity are tax-deferred. This means that the money inside an annuity can grow without the immediate burden of income tax being due, allowing the money to compound more effectively over time.

When withdrawals begin, income tax is due on the withdrawn amount. However, the payouts from the annuity can also be spread out over the payout period. This tax-efficient strategy can help you plan for, and even manage, your tax burden in retirement.

4. Protection Against Market Losses

The stock market’s volatility can cause great stress for retirees who depend on their investments for income. Annuities provide a solution by protecting crucial assets from market losses.

While growth potential of annuities might be lower than those of riskier investments, the trade-off is a sense of security that people have from knowing that their principal is protected. This aspect makes annuities an appealing option for risk-averse investors who prioritize stability over high returns.

5. Competitive Interest Rates

Bank CDs (certificates of deposit), savings accounts, and traditional interest-earning assets may offer lower interest rates than fixed-type annuities do, limiting the growth potential of one’s savings. Annuities, on the other hand, have the potential to beat the bank and other low-interest vehicles, especially in a low interest rate environment.

Life insurance companies invest the annuity premiums into a variety of assets, which can include bonds, stocks, and real estate. For fixed-type annuities, most premium dollars go into low-risk investments. As a result, annuities can earn more competitive yield over the long term compared to other low-risk investments and instruments.

6. Resources for Long-Term Care

Long-term care costs can be a major concern for retirees. Annuities can address this concern through optional, add-on benefits that provide access to funds for long-term care needs.

Some annuities offer enhanced payouts if someone requires long-term care, helping relieve the financial strain associated with medical and caregiving expenses. This feature provides retirees with the peace of mind that they won’t be forced to deplete their assets to cover unexpected healthcare costs.

7. Guard Against Inflation

Inflation eats away into the purchasing power of retirement income over time. Annuities offer options to counteract this effect by providing payouts that increase with inflation.

These inflation-adjusted annuities help assure that retirees can keep up their lifestyle even as the cost of living rises. In turn, annuity owners have financial resources with the annuity’s lifetime payments to meet their financial needs throughout their retirement years.

8. Protection from Probate and Creditors

When someone passes away, the transfer of assets to heirs through the probate process can be time-consuming and expensive. However, annuities often bypass probate and pass directly to the designated beneficiaries, simplifying the estate settlement process.

Additionally, annuities can offer protection from creditors in certain situations. That can help loved ones receive their assets without the disruption of outstanding debts or legal claims. This protection varies by state, however.

The Bottom Line on Why People Buy Annuities

In times when economic conditions are uncertain, people want some measure of protection and stability in their financial plans. There is a lot of peace of mind that can come from having some strategies for financial stability and security in your overall retirement plan. Annuities are a versatile solution that can address many financial risks with their contractual guarantees.

Many people use annuities to supplement their Social Security and provide a guaranteed lifetime income for retirement. They can enjoy tax-advantaged growth for their money, protect assets against market losses, and have a guard against inflation. The ability to have financial resources for long-term care, shield assets from probate and creditors, and have solid interest-earning potential also increases the appeal of annuities.

However, remember that annuities come in various forms, each with its own set of features, benefits, and costs. Before committing to any annuity (or a financial product of any sort, for that matter) talk to your financial professional, have them explain it, and ask any questions on your mind. Make sure that they choose the type of annuity that aligns with your personal financial situation, goals, and risk tolerance.

Ultimately, the annuity needs to solve clear problems in your financial plan and be part of a well-rounded retirement strategy that is tailored to your unique picture. Talk to your financial professional about annuities today and how they can work for you.

If you are looking for a financial professional to help you sort out your retirement ‘what-ifs’ in general, you may want to look for someone independent. An independent agent or financial advisor has the ability to offer solutions from multiple insurance and financial companies – not just one parent company or a few companies – and has the business freedom to shop among all those options for you.

If that matches up with your situation, many independent and experienced financial professionals are available here at SafeMoney.com. Get started by visiting our “Find a Financial Professional” section, where you can connect with someone directly and discuss your situation. Should you need a personal referral, please call us at 877.476.9723.

The post Why Do People Buy Annuities? A Closer Look at Some Reasons for Owning Them first appeared on SafeMoney.com.

To that end, ensuring a secure and stable income during retirement is a top priority. While there are a variety of financial vehicles that you can tap for income, annuities are an effective way to maximize retirement income.

With their contractual guarantees, they offer a unique way to provide a steady stream of income throughout retirement, helping retirees maintain their lifestyle and meet their financial needs. The risk tied to annuity payouts is pooled by insurance companies across thousands of contract holders, creating efficient risk management that no individual retirees can produce by themselves.

In this article, we will cover using annuities for retirement planning, their benefits, and some reasons for including them as part of a comprehensive retirement plan. Before going further, let’s cover the basics of annuities.

What Are Annuities?

Annuities are contracts offered by insurance companies that are designed to pay a regular income stream to someone. The insurance company makes this promise in exchange for a lump-sum payment or a series of payments from the contract holder.

They are classified into various types: fixed, variable, fixed index, multi-year guarantee, and immediate annuities. Each kind offers distinct features and benefits.

Immediate Annuities

Immediate annuities are started with a single lump-sum premium, and the income payments begin almost immediately. In many cases, the first payments are within 30 days of the contract start date.

Immediate annuities are also known as “single premium immediate annuities,” or SPIAs for short. They are a good option for those seeking an immediate and predictable income stream during retirement. In today’s market, immediate annuities come in both fixed and variable flavors, depending on what someone prefers for risk and market exposure.

Fixed Annuities

Fixed annuities offer a guaranteed rate of growth, and the insurance company assumes the investment risk. This guaranteed rate is good for a certain period, then the insurance company renews this rate at a higher or lower level.

The longer the guaranteed period, the higher the growth rate tends to be, as you are making a longer-term commitment with a longer contract duration. As the insurance company sets the guaranteed rate whenever the contract period is over, there is “renewal rate risk,” or the chances that the new guaranteed rate will be lower than the original.

You can avoid this risk by opting for a longer traditional fixed annuity or for a close annuity cousin that guarantees the rate for a longer period, called a multi-year guarantee annuity (more on that later). Just like with all annuities, a fixed annuity can pay a guaranteed income stream. However, most annuity owners have this kind of annuity for the interest earnings.

Variable Annuities

On the other hand, variable annuities offer a more flexible approach to investing. The premiums paid by someone are invested in a range of subaccounts, which are similar to mutual funds.

In other words, the annuity owner holds the investment risk, and the value of the money inside the annuity can change based on the performance of the underlying investments. Variable annuities may appeal to those seeking potential higher growth potential but are willing to stomach market risks.

Variable annuities can pay a guaranteed income stream, although some have an add-on rider benefit that lets your income benefit grow at a guaranteed rate. Other variable annuities can have the income fluctuate depending on how the subaccounts perform. You may want to check with your financial professional if that is an important factor for you.

Fixed Index Annuities

Fixed index annuities are almost like a happy medium between fixed and variable annuities. The annuity’s growth potential is linked to an underlying benchmark market index, such as the S&P 500 price index.

Fixed index annuities can earn interest based on a portion of index gains while also protecting the principal against market downturns. In exchange for this protection, the growth potential can be limited by insurance companies with caps, participation rates, or spreads.

Benefits of Using Annuities for Retirement Income

There are a variety of advantages to using annuities as part of an overall retirement income strategy. Let’s cover them now in depth.

Lifetime Income

One of the biggest advantages of annuities is their ability to offer guaranteed lifetime income. This means that once the income payments begin, they will continue for as long as someone lives, regardless of how long that may be.

This feature provides a crucial guard against longevity risk, arguably one of the hardest-to-predict risks in retirement. That helps ensure that retirees won’t outlive their savings.

Stability and Predictability

All annuities can offer a guaranteed income, but fixed annuities and fixed index annuities in particular can offer more stability and predictability in a retirement income stream. This is due to the principal protection feature of these contracts, and also how the annuity payments can grow over time before they are turned on.

Retirees can count on a pre-determined payout amount, which allows for easier budgeting and planning during retirement. They can also count on this income stream for years or even decades, depending on how long they expect that retirement might last.

Tax-Advantaged Growth

Annuities offer certain tax advantages. Just like money within a qualified retirement account, such as an IRA or 401(k), money inside an annuity has special tax treatment. The annuity’s earnings are tax-deferred until withdrawal. This can be beneficial for building up more retirement assets over time, but keep in mind that you will pay income tax on your withdrawals.

Diversification of Retirement Income

Adding an annuity to a retirement income strategy can provide diversification. Annuities complement other sources of retirement income, such as Social Security and pensions, by creating a separate income stream.

Diversification can help reduce the impact of market volatility on overall retirement income.

Estate Planning

Annuities can also be used as part of an estate planning strategy. With certain annuity options, such as a joint and survivor annuity, income payments can continue to a surviving spouse or beneficiary even after the annuitant’s passing.

This ensures ongoing financial support for loved ones. It can be particularly valuable for couples concerned about the financial security of a surviving spouse.

Considerations for Incorporating Annuities into Retirement Planning

While annuities offer many benefits as a retirement income strategy, they aren’t right for everyone. Consider the following factors before you commit to including annuities in your retirement plan:

Financial Goals and Risk Tolerance

Retirees must assess their financial goals and risk tolerance when choosing an annuity. For risk-averse individuals seeking stable income and protection against market volatility, a fixed or fixed indexed annuity may be more appropriate.

On the other hand, those comfortable with market fluctuations and seeking potential higher growth potential might consider a variable annuity. Talk to your financial professional to see what might make sense for your situation and goals.

Understanding Fees and Expenses

Annuities can come with fees or charges, though this is typically tied to the annuity kind. For example, variable annuities often come with various fees and expenses, such as administrative fees, and mortality and expense charges.

Annuities also have surrender charges for early withdrawals. If you have long-term goals for which the annuity helps solve, then many annuity owners would say that the commitment is worthwhile.

It’s important to understand any costs tied to your annuity and how they impact your contract, benefits, features, or other details.

Liquidity and Access to Funds

Annuities typically have limited liquidity, especially during the surrender period. However, they do tend to have provisions for “free withdrawals,” or where you can take up to 10% of the contract per year without penalty.

Withdrawing excess funds above that level prematurely may result in penalties. Therefore, it’s crucial to make sure that people have sufficient liquid assets outside of annuities to cover emergency expenses and unexpected financial needs.

Inflation Protection

Annuities can help your income keep up with inflation… to a fault. But it’s best for them to work with other holdings in a comprehensive retirement portfolio so that you have financial vehicles with market risk, but higher growth potential than what fixed-type annuities can offer. That can help your money keep up with inflation overall.

What’s more, some annuities offer inflation-adjusted options or other increasing payment options. Alternatively, retirees may choose to create a diversified retirement income plan that includes investments with potential for growth to counteract inflation.

Annuity Creditor Protection

The level of creditor protection for annuities varies depending on state laws. In some cases, annuities may offer additional protection against creditors, which can be a nice boon for asset protection strategies.

The Bottom Line on Annuities and Retirement Planning

Annuities can be a valuable tool in retirement planning, offering guaranteed lifetime income, stability, and tax advantages. By providing a steady stream of income, annuities can help retirees maintain their desired lifestyle and keep up financial security.

However, it’s essential to carefully consider individual financial goals, risk tolerance, fees, and liquidity needs before incorporating annuities into a comprehensive retirement plan. Working with an experienced financial professional can help people make well-informed decisions and explore an annuity strategy that matches up with their personal situations and retirement objectives.

If you are looking for someone to help you with your questions about retirement, many independent and knowledgeable financial professionals can assist you here at SafeMoney.com. Get started by visiting our “Find a Financial Professional” section, where you can connect with someone and request an initial appointment to discuss your goals, concerns, and personal situation. If you would like a personal referral, please call us at 877.476.9723.

The post Using Annuities for Retirement Planning: Maximize Income and Protect Savings first appeared on SafeMoney.com.

In this article, we will go over the basics of an annuity bonus, what it involves, what situations in which you might consider one, and the pros and cons of an annuity bonus. In general, annuities that come with a bonus are called “bonus annuities.”

What Are Bonus Annuities?

Bonus annuities are annuities that pay you a bonus either upon the start of the annuity contract or over a certain timespan. In many annuity contracts, the bonus might vest over time for the entire contract period (also known as a maturity period). However, there are generally only three situations where a bonus annuity may be warranted.

Say that you are thinking about moving money from one annuity into a new one, but the old annuity still has its surrender charge schedule in effect. If the new annuity had a bonus, then the bonus from the new annuity can offset the penalty from leaving the old contract early.

Annuity bonuses are also good if you want upfront growth without having to wait for it. They can also be good if you want more interest earnings upfront, as with a fixed annuity. Just know that you might give up growth potential for the rest of the contract period in exchange for this upfront growth. In some cases, non-bonus annuities might earn more interest than their bonus variations.

Which Annuities Offer Bonuses?

Upfront bonuses are usually found in fixed index annuities. These annuities earn interest based on how an underlying benchmark index changes in value, but they also guarantee your principal. When that benchmark index goes up, the gain is based on a portion of that increase. When the index goes down, the principal and gains are locked in.

Several fixed index annuities offer these bonuses as an incentive for people to own them, but many of the higher-growth fixed index annuities don’t come with bonuses. When an annuity offers a bonus, it usually comes at the expense of lower rates, and therefore reduced growth potential, from then on.

Some variable annuities also offer bonuses, which are then invested into subaccount funds that are chosen by the annuity owner. In other variable annuities, the money is dollar-cost averaged into the subaccounts over time, with the initial money earning a relatively high interest rate in a fixed account.

Here is a good thing to keep in mind about annuity bonuses. First, annuities do offer some liquidity with free withdrawals, which let you take out up to 10% of an annuity’s contract value per year. But say that you decided to withdraw above that amount or even exit the contract early.

In that case, some or all of the bonus could be taken away in addition to any surrender charges. As mentioned before, many bonuses have a vesting schedule that must be met before the annuity owner can walk away with the money.

How is the Annuity Bonus Calculated?

In most cases, the annuity bonus is simply a percentage of the amount of initial premium that is placed into the contract. For example, say that a given fixed index annuity has a maturity period of 12 years. It may offer a bonus of 12%, which means that if you put $100,000 in the contract, you will get a bonus of $12,000 upfront.

However, you won’t be able to withdraw that bonus amount right away. This bonus may vest at the rate of 1% per year for the next 12 years, so that if you withdraw more than a certain amount three years from now, you will forfeit 9% of that bonus on the amount you withdraw.

What is a Typical Bonus Paid on an Annuity?

In general, upfront annuity bonuses tend to run anywhere from 3% to 12%. Most annuity bonuses tend to fall into the 5-10% range.

Bonuses that are included in the initial interest rate of fixed annuities may be one to two percent. This “teaser” rate usually only lasts for a year or two.

Is an Annuity Bonus Right for You?

If you fall into one of the three categories mentioned above, then yes, a bonus annuity may be what you are looking for. The bonuses that are paid start accruing interest right away, although it’s also a trade-off for a slower rate of growth over time.

Here are three questions that you can ask yourself if you are exploring a bonus annuity:

1. Do I want immediate growth?

Although the overall rate of growth will be slower, a bonus annuity can pay you now. This is the chief advantage of this type of annuity. But if your goal is overall growth, then a non-bonus annuity can usually pay you more interest in return for having to wait for it.

2. Will I pay a surrender charge on the annuity that I am moving into the bonus annuity?

If so, the upfront bonus can partially or totally offset the surrender charge. Ideally, it will pay the total surrender charge. Insurance companies also have their own rules for accepting transfers of annuity money into new bonus annuities. Be sure to speak with your financial professional about that.

3. Do I want a higher interest rate now?

If so, then a higher “teaser” rate on a fixed annuity may be what you are looking for. Since interest compounds on the interest, it can boost your overall contract value, especially if you might be using that annuity for income later on.

But the subsequent interest rate will be lower to make up for this in most cases. The insurance company may lower rates for that purpose.

The Bottom Line on Annuity Bonuses

Remember, if the answer to at least one of these three questions is not yes, then you probably will get more bang for your buck from an annuity that doesn’t pay a bonus. Also, never buy an annuity just for its bonus.

The rest of the terms and features of the contract must make sense for you as well. The annuity also needs to have a defined role and be a clear solution for a gap in your financial plan. Consult your financial advisor for more information on annuity bonuses and whether they are right for you.

Are you looking for a financial professional to help guide you through your retirement questions and what-ifs in general? If you are ready for personalized guidance, many independent and experienced financial professionals are available here at SafeMoney.com.

Visit our “Find a Financial Professional” section to connect with someone directly, where you can request a complimentary appointment to discuss your goals, needs, and situation. Should you want a personal referral, call us at 877.476.9723.

The post Does an Annuity Bonus Make Sense for You? first appeared on SafeMoney.com.

Annuities can supplement your Social Security payments by providing additional guaranteed income that will remain steady regardless of how the markets perform. They can also help ensure that you have enough money coming in every month to cover all your living expenses.

In this article, we will go over more of the steps of how to roll over an IRA or 401(k) into an annuity. None of the steps are especially complex, but they must be done properly to ensure no tax consequences from the rollover (unless you are converting your annuity to a Roth account). To start off, let’s talk more about why someone might want to move some of their retirement money into an annuity.

Why Roll Retirement Money Over into an Annuity?

Annuities are different from all other financial vehicles because they can pay you a guaranteed stream of income for the rest of your life. This means that you will continue to get income payments even if the money in your annuity contract value runs to zero.

If you are worried about running out of money in retirement, the risk of investment losses affecting your income, or other pitfalls affecting your lifestyle, an annuity can help bring more financial peace of mind. It can also be a boon for those wanting more income on top of what Social Security pays them.

How Much Money Should I Roll Over into an Annuity?

This will depend on your financial situation and goals. An annuity can help you cover your monthly living expenses and keep up your lifestyle in retirement. It can also supplement your income from Social Security (and maybe a pension if you have one). You may already have enough dependable income from Social Security and your pension to meet your living expenses.

Either way, you can at least roll over enough into an annuity to help you generate a stable retirement income that you can rely on after you stop working. Your risk tolerance and retirement timeline also have a role in determining how much money you might put into annuities.

Your financial professional can help you with exploring options for your specific situation, including what can get you to the guaranteed income number that you might need. But your financial timeline should also line up with the length of surrender period, or the maturity period of your annuity, in your contract.

The annuity money should also be earmarked for guaranteed income and not needed as a source of major liquidity. For example, if you think you will need to pull out all your money from an annuity in five years, then you probably don’t belong in an annuity.

What Type of Annuity is Right for Me?

There are many different types of annuities today. If you need immediate income, then an immediate annuity will start paying you a guaranteed stream of income right away. However, you will lose access to your funds and can’t change the terms of the payout once it has begun. If you won’t need any income until later, then you could get a deferred annuity that will grow for a period of time and then pay out the income when you need it.

There are three primary types of deferred annuities. Fixed annuities pay a set rate of interest, while fixed index annuities can earn interest that is based on financial benchmark index and its ups or downs. When the index has a gain, the fixed index annuity is credited a portion of that growth. Variable annuities invest in mutual fund subaccounts that rise and fall in tandem with the markets. It is possible for you to lose money in a variable annuity. 

You may also take other factors into account, such as the annuity death benefit and how the proceeds may be paid to your loved ones. Some annuities pay a lump-sum death benefit while others may stretch it over time, for example.

How to Roll Over Your Retirement Money to an Annuity

If you have money in an IRA or 401(k) (or similar retirement account), then you will start the rollover process by completing an application with the annuity company that you want. You will have to answer each question and then submit your application to the insurance company. In many cases, this process can be done online.

You can then fill out a transfer form that the insurance company will send to your current plan to requisition your funds. You could also have the plan just send you a check. However, then you must get that check to the insurance company titled correctly within 60 days, or your rollover will become coded as a distribution. If this happens, your distribution will become fully taxable, and you may also have to pay an additional 10% penalty if you haven’t yet turned 59.5.

For this reason, it’s prudent to use a direct transfer to move your money from your current retirement plan or account into an annuity. This way, the money goes directly to the annuity company and doesn’t require your involvement.

If you are at the age where you must start taking required minimum distributions, then virtually all annuity companies will allow for this without penalty. These distributions are taxable, but you can elect to have taxes withheld from them.

The Roth Factor

If your money is in a Roth IRA and you want to put it into an annuity, then you can enjoy a stream of income tax-free cash-flow during retirement that you can count on every month for life.

You must have had a Roth IRA open for at least five years before you can take any tax-free withdrawals, and you must be at least 59.5. However, once these provisions are met, you can take out money from your Roth account without having to worry about income taxes.

5 Questions to Ask Regarding Whether Rolling Retirement Money Over to an Annuity Makes Sense

#1 What Is Your Risk Tolerance?

If you want to get some growth potential for your money without risk of market losses, you may want a fixed index annuity. Fixed annuities may also be an option if you want a rate of guaranteed growth.

#2 What Is Your Time Horizon in Retirement?

As mentioned before, if you think that you will need all of your money inside the annuity back within a few years, then an annuity may not be a good choice. For insurance companies to meet their obligations to annuity owners, every annuity has a surrender period.

During that period, you will pay a penalty if you take out more than a certain percentage within the first few years. Many annuities allow you to withdraw 10% of the contract value, and the penalty kicks in for percentages above that. This is called a “free withdrawal.”

#3 What Are Your Retirement Income Needs?

If you know that Social Security alone won’t cover all your retirement expenses, then you can count on an annuity to help you generate the income you need.

#4 What Is Your Life Expectancy?

If you come from a family with a history of long living, an annuity can ensure that your money will last for as long as you do. Annuities are designed to provide lifetime income.

#5 Do You Want to Leave a Legacy for Your Heirs?

Some annuities provide an enhanced death benefit that can leave your heirs more money than the current contract value. Some will pay out the death benefit proceeds in a lump sum, while other annuities stretch the proceed payouts over a period, like five years.

Ask your advisor about the details of your annuity contract if this also matters to you.

The Bottom Line

Many people roll some of their retirement money into annuity contracts every year. The process is pretty straightforward and can provide you with many benefits, especially for maximizing retirement income.

Consult your financial advisor for more information on annuity rollovers and whether one is right for you. The most important thing is that the annuity should make sense for your situation and your goals. It must solve a problem in your financial plan that other assets don’t.

If you are looking for a retirement-focused financial professional to help you in general, many independent and experienced financial professionals are available here at SafeMoney.com. You can get started with an initial appointment to discuss your situation by visiting our Find a Financial Professional” section and connecting with someone directly. Should you want a personal referral, please call us at 877.476.9723.

The post How to Roll Over an IRA or 401(k) to an Annuity first appeared on SafeMoney.com.

Yes, opinions are subjective, but even the self-styled “Money Lady” gets it wrong on annuities, especially fixed index annuities. That does a disservice to retirees and those planning for retirement. Ultimately, it limits their options that could help them reach their financial goals: paying them reliable monthly income, giving protection against market risk, offering guaranteed growth above what various fixed-interest assets may earn, and providing other benefits.

Another issue with Orman’s anti-annuity stances is that they often capture only part of the picture of a specific annuity kind or feature. Just like other financial products, annuities come in many flavors, and each one has its own strengths and purpose.

In this article, we will focus on Suze Orman and her public statements on fixed index annuities — and how these opinions miss the mark on how the unique guarantees of these products can help people in retirement.

The Purpose for Fixed Index Annuities

“In their struggle to keep up with mutual funds, around 1994 the insurance industry introduced another new kind of annuity, the Indexed Annuity. The reason for this new product was the life insurance industry’s desire to capture some of the money that was pouring into index mutual funds. These funds track various market indices such as the Standard and Poor’s 500 index.”

– Suze Orman writing on annuities on SuzeOrman.com

Actually, fixed indexed annuities were created in the 1990s to be a better alternative to bank CDs, fixed annuities, and other low interest-earning assets. Retirement savers were frustrated at poor interest rates offered by these products given the then-low interest-rate environment.

The bond market collapse in 1994, in which the Fed hiked interest rates to 1.5%, left many fixed-income investors off-balance. Bond fund returns were poor, and the prior high interest rate days of fixed annuities soon ended.

In response to the growing demand for something better, life insurance companies began to innovate. The first fixed indexed annuity in the U.S. came when the insurance company Keyport Life introduced the first product in 1995. Genesis Financial of Canada was a partner in this new offering.

Keyport explored the possibility of using a few cents in every dollar of fixed index annuity premium to buy call options and give the potential for higher growth than what you might get with a fixed annuity. Other life insurance companies soon followed suit, as they saw the success of the fixed indexed annuity and its rapid growth in popularity.

Interest rate conditions are different now, but fixed indexed annuities are still designed to fill their original purpose of offering potentially higher interest earnings. These rates often exceed those of other kinds of fixed-interest instruments. But they weren’t – and aren’t – designed to compete with the returns posted by stocks and other equity-based assets.

A fixed indexed annuity isn’t a security (investment product), nor is it meant to be. It’s an insurance contract that offers the benefit of being a tax-advantaged retirement savings vehicle. You can also receive from the annuity a guaranteed lifetime income stream, regardless of what market conditions might be.

Comparing Fixed Index Annuities and Mutual Funds

“Why wouldn’t it be better simply to invest in a mutual fund that buys the entire index and get 100% of the return? For some people, it would be better, but for others who do not want to take any risk at all this indexed annuity might be better.”

– Suze Orman writing on annuities on SuzeOrman.com

Placing fixed index annuities in the same boat as mutual funds fall flat in many ways. For one, it’s not an apples-to-oranges comparison.

A fixed indexed annuity isn’t a security. It’s an insurance product that, again, may grow more in value than what other types of fixed-interest instruments can reach. According to Wink, a market intelligence firm on annuities, a fixed index annuity is intended to earn 1% – 2% above what a fixed annuity earns for a given period of time. So, if a fixed annuity has an annual guaranteed rate of 3.5%, then the fixed index annuity may earn 4.5% – 5.5% also in a year. Again, that isn’t a for-sure but just a back-of-envelope tip for the annuity’s growth potential.

When used properly, some roles for fixed index annuities are tax-deferred growth, protection of principal, and guaranteed lifetime income. Some annuity owners who can’t medically qualify for life insurance use fixed indexed annuities to grow their estates and leave a legacy to heirs. Annuities may also be used to fund long-term care expenses, again due to underwriting requirements for other insurance-based solutions.

Comparing the growth of fixed indexed annuities to market-based investments will create fundamental misunderstandings that can lead to disappointment later on. Again, it’s not meant to compete with market returns of stocks and other similar investment products.

Fixed Index Annuities and ‘Downside Risk’

“In many indexed annuities, you do not participate in any downside risk.”

– Suze Orman writing on annuities on SuzeOrman.com

This statement is wrong for a few reasons. “Downside risk” can make people think of a fixed index annuity as an investment product – and again, it’s not. Nor is the “many” language accurate. In fact, all fixed indexed annuities have a floor of protection against index losses.

When your annuity’s index goes down in value in a certain period, you are credited with zero interest for that timespan. Your principal and the interest you earned in previous crediting periods are locked in. This protective feature is built into all fixed indexed annuity products, and it has been there since these products first came about.

Blanket Write-off Statements About Fixed Index Annuities

“I’m not a fan of index annuities. These financial instruments, which are sold by insurance companies, are typically held for a set number of years and pay out based on the performance of an index like the S&P 500. (Be advised that insurers aren’t necessarily transparent about how they calculate any gains credited to your annuity.) They do offer a guaranteed return, but it can be under the rate of inflation, and there are caps on the amount of interest you can earn. Plus, if you don’t want to keep an annuity for its entire term, you could lose 10 percent or more of your investment to a surrender charge. Honestly, I’d be suspicious of any adviser who wants you to go this route. Instead, I’d recommend that you stick to your workplace retirement plan, if you have that option. You can contribute up to $17,500 this year ($23,000 if you are at least 50). If you don’t have a company 401(k) or you have more funds to invest, you can set aside $5,500 ($6,500 if you are at least 50) in a traditional or Roth IRA.”

– Suze Orman writing on annuities on Oprah.com

There are many misnomers in Orman’s description of fixed index annuities here. First of all, saying that she “isn’t a fan” of them and that they “are sold by insurance companies” are short-sighted.

“Not being a fan” of them is a tunnel-vision statement that lack any context for the financial situation of someone who might be exploring an annuity. Saying that they are “sold by insurance companies” reads like it’s supposed to be a negative. However, insurance companies are in the risk management business and help millions of people with maintaining financial security.

The danger of painting with a wide brush here is that it can lead people away from fixed index annuities, and they might otherwise benefit from their specific contractual guarantees.

Moreover, Orman focuses heavily on fixed index annuities in terms of growth. This misses the mark entirely on the value of this type of annuity in retirement, when someone is in the distribution phase of life. At that point, growth doesn’t matter as much as dependable income streams.

Most annuity buyers are in their 50s to 70s. In this stage of life, preservation and distribution of assets for retirement are the crucial factors. A fixed index annuity can pay someone an ongoing income stream that lasts as long as they may live, something which, again, Orman completely leaves out.

Some Final Thoughts on Suze Orman and Annuities

Orman is a widely-known celebrity financial commentator, but there are risks to heeding one-size-fits-all financial advice such as hers for your personal situation. Leaving annuities, particularly fixed index annuities, out of the picture leaves you with fewer options to enjoy a secure retirement income and a comfortable retired lifestyle.

Depending on your needs, goals, and circumstances, having some guarantees can help with the foundation of your retirement financial plan. Consult your financial advisor today for more information on fixed indexed annuities and whether they are right for you.

What if you are looking for someone to ask more about these annuities, what they can do, and about your financial situation in general? You may want to work with someone who is independent and not beholden to any one parent financial company (and therefore can offer you limited options for solutions). If talking with an independent financial professional sounds appealing to you, many independent and experienced financial professionals who understand annuities can assist you here at SafeMoney.com.

Use our “Find a Financial Professional” section to connect with someone initially. You can request a complimentary appointment to ask your questions and discuss your goals as well as situation. Should you need a personal referral, please call us at 877.476.9723.

The post Is Suze Orman Off the Mark on Annuities? first appeared on SafeMoney.com.