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ABC’s of Annuities

Navigating the realm of retirement planning can feel like sailing a course through uncharted waters. With an array of financial instruments and investment options available, it’s easy to feel overwhelmed and uncertain about which path to take. Among these choices, annuities stand out as a compelling tool for potentially securing financial stability in retirement.

Over the past several years, there has been a great deal of attention focused on the huge number of Baby Boomers retiring. More than 11,000 Americans are turning 65 each day — equating to over 4 million a year. According to LIMRA’s Retirement Investors — Behaviors, Attitudes, and Financial Situations, forty-five percent of investors say stock market volatility has made them more interested in investments with downside protection. As a result, interest in annuities — which was as low as 33% in 2018 — jumped in 2022. For the first time, a majority of pre-retiree workers (51%) said they would consider converting a portion of their assets into a lifetime-guaranteed annuity in retirement. Pre-retirees’ interest remained high in 2023, with 52% willing to consider annuities.

In this blog, we’re exploring annuities and how they can serve as a cornerstone of your retirement income strategy. From understanding the basics of annuities to uncovering their potential benefits and risks, we’ll offer you the knowledge and insights needed to make informed decisions about incorporating annuities into your retirement plan. 

A – Annuities Defined

An annuity is a financial product that provides a guaranteed stream of income over a specified period, often throughout retirement. In exchange for either a lump sum payment or a series of contributions, the annuitant receives regular payments, which can be fixed or variable, depending on the type of annuity chosen. Annuities are designed to provide financial security by helping ensure a steady income flow, offering tax-deferred growth potential, and sometimes including additional benefits such as death benefits for beneficiaries.

There are three types of annuities: Fixed, indexed, and variable.iowa fiduciary

  • Fixed Annuity: Here, you agree to deposit a lump sum of money or a series of payments and the insurance company agrees to pay a guaranteed rate of interest over a set period. Other features of a fixed annuity include:
    • It compounds on a tax-deferred basis.
    • Principal and interest are guaranteed by the financial strength of the insurance company that issues it.
  • Indexed Annuity: This one earns interest based on the performance of an underlying financial benchmark like the S&P 500 Index and is subject to interest rate caps. Other benefits include:
    • It provides the opportunity to enjoy the benefits of positive upturns in the index (subject to a cap) with a limit to downside risk.
    • You are not directly invested in the stock market or index.
  • Variable Annuity: This one places your money in investments that you select from a list made available by the issuing insurance company. Other features include:
    • It does not offer guaranteed returns and may lose or gain value depending upon the performance of the investments.
    • All guarantees are dependent upon the claims-paying ability of the issuing insurance company.

B – Benefits of Annuities

    1. Guaranteed Income: One of the primary advantages of annuities is the ability to create a predictable stream of income, which can last for a specified period or even a lifetime. This feature helps provide reassurance and financial security, particularly for retirees concerned about outliving their savings.
    2. Deferral: Unlike many other investment vehicles, earnings within an annuity grow tax-deferred until withdrawals are made. This tax advantage can help enhance the compounding effect, allowing your investment to grow more rapidly over time.
    3. Death Benefit: In the event of the annuitant’s death, annuities often provide a death benefit that helps ensure a portion of the remaining account value goes to designated beneficiaries. This feature can offer peace of mind by helping protect loved ones’ financial well-being.
    4. Diverse Options: Annuities come in various types, including fixed, variable, and indexed, each offering unique features and investment strategies. This diversity allows individuals to tailor their annuity contracts to match their risk tolerance, investment objectives, and financial circumstances.
    5. Flexibility: Annuities allow for customization to suit individual needs and preferences. Whether you prefer immediate or deferred annuities, fixed or variable payouts, or additional features such as inflation protection or long-term care benefits, there are options available to align with your specific circumstances.

C – Considerations Before Investing

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  • Costs and Fees: While annuities offer many benefits, they often come with fees and expenses that can eat into your returns. It’s crucial to understand the fee structure, including sales charges, administrative fees, and underlying investment expenses, before committing to an annuity contract.
  • Surrender Charges: Some annuities impose surrender charges if you withdraw funds before a specified period, typically ranging from five to ten years. These charges can significantly reduce your liquidity and should be carefully evaluated, especially if you anticipate needing access to your funds in the short term.
  • Market Risks: While fixed annuities offer guaranteed returns, variable and indexed annuities expose investors to market risks. Understanding your risk tolerance and investment objectives is essential when considering these types of annuities, as fluctuations in the market can impact your account value and income potential.
  • Financial Strength of the Issuer: Since annuities are backed by insurance companies, it’s vital to assess the financial strength and stability of the issuing company. A reputable insurer with a strong track record of financial stability is more likely to fulfill its obligations over the long term, helping provide greater security for your investment.

D – Diversification and Integration

Annuities should be viewed as one component of a well-diversified investment portfolio rather than a standalone solution. By integrating annuities with other assets such as stocks, bonds, and real estate, investors can help mitigate risk and enhance overall portfolio performance. A balanced approach that aligns with your financial goals and risk tolerance is key to helping maximize the benefits of annuities within your investment strategy.

E – Education and Experienced Guidance

Navigating the world of annuities can be complex, and seeking education and guidance is essential for making informed decisions.iowa fiduciary Whether through independent research, consultations with financial advisors, or educational resources provided by reputable sources, acquiring knowledge about annuities and their implications is crucial for achieving financial success.

At Johnson Wealth and Income Management, we understand the importance of tailored financial solutions to meet individual retirement goals. With our experience in investment management, we work closely with clients to develop personalized strategies aligned with their risk tolerance, financial objectives, and time horizon. 

When it comes to choosing the right annuities, our team conducts thorough research and analysis to identify options that best suit each client’s needs. Whether seeking guaranteed income, tax-deferred growth, or a combination of both, we provide comprehensive guidance and recommendations to help ensure informed decision-making. By leveraging our extensive knowledge and resources, clients can navigate the complexities of annuities with confidence, knowing they have a dedicated partner committed to helping them achieve financial security in retirement.

Always Remember Risk

As we’ve seen in this blog, there’s a lot to unpack when it comes to annuities. Which is why it’s vital to remember that any annuity can be disadvantageous if it doesn’t match your goals. While they can be an excellent planning tool to reduce your risk of running out of money in retirement, they do come with trade-offs, such as fees and reduced investment returns. There are so many types of annuities, annuity issuers, and annuity products, so it’s difficult to generalize about the benefits and drawbacks, so always speak with your financial advisor, preferably a Fiduciary, before purchasing annuities or any other type of investment vehicle.

Final Thoughts

Understanding the ABC’s of annuities empowers individuals to make informed decisions about their financial future. By recognizing the benefits, considering key considerations, integrating annuities into a diversified portfolio, seeking education and guidance, and maintaining flexibility, investors can leverage annuities to achieve their long-term goals and help secure a stable and prosperous retirement. As with any financial decision, thorough research, careful planning, and ongoing evaluation are essential for maximizing the benefits of annuities and building a solid foundation for financial well-being.

Contact us today for a complimentary consultation to get started.

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