Living comfortably as a retiree is a top priority for many workers as they save and strategize for the future. When creating a retirement income plan, you have many opportunities to build your savings and ensure you have the money you need for planned and unexpected expenses. One of these opportunities is an annuity. As you research different solutions and prepare to meet with a financial professional, here are nine questions you may want to ask your financial professional if you’re considering adding an annuity to your overall financial plan.
“Much like insuring a home, car, or even your life, shielding your retirement income from loss should be top of mind. Annuities are the only financial product in the market today that can offer both protection for your savings from market loss and a guaranteed income stream” shares Kevin Mechtley, Vice President of Business Development and Chief Innovation Officer of Sammons Independent Annuity Group, a division of Sammons Financial Group. At its core, an annuity is an insurance product. It’s a contract between you and an insurance company where you make a lump sum payment or monthly payments (known as premium) to the insurance company for a future guaranteed income stream. Depending on your needs and specific goals, you can choose from a deferred or immediate annuity.
Using a lump sum, you can buy an annuity that will provide income payments for a set period. Typically, payments begin within a year or less of purchasing the contract.
With a one-time or recurring payment, you can purchase a deferred annuity that can begin providing an income stream at a later date. Common types of deferred annuities include:
Value grows over time at a set interest rate so you may have predictable returns and tax-deferred growth.1
Value growth is linked to financial market performance, so you have the potential for higher growth but can also lose value if the market drops.
Growth is tied to the performance of an external index. FIAs protect premium from market downturns by flooring returns at zero.
“Annuities can offer many features that can help combat against income hurdles, such as providing inflation protection or triggering additional benefits for an unexpected health event, states Mechtley. “Just knowing that your annuity product can help provide income through the ups and downs of life can give peace of mind against the unknown.”
Annuities offer many benefits that can supplement your overall retirement plan, but aren’t right for every situation. Here are some pros and cons to keep in mind as you explore the purchase of an annuity.
|Annuity advantages||Annuity disadvantages|
|Ability to turn on guaranteed income and other features to help meet your specific needs||May charge fees to withdraw funds early (known as surrender charges2)|
|For certain annuities, protection against market volatility and decreases||Depending on the type of annuity, may charge maintenance or rider fees|
Adding an annuity to your portfolio may help you grow your savings and the ability for a guaranteed income stream in retirement. You’ll have the opportunity for your money to grow tax-deferred2 and can help supplement your other retirement savings. With people living longer, you could face a lengthy retirement where you’ll need your savings to last for many years. An annuity can provide an income stream you can count on to help you cover day-to-day expenses and unexpected expenses like long-term care or medical bills.
“There is no perfect age to buy an annuity, it really depends on your goals,” adds Mechtley. “In general, people tend to buy annuities when they’re between 40 and 70 years old.”
Mechtley mentions that some providers may have a maximum age limit. Your health or family medical history might also play a role on when you buy.
If you want to buy an annuity, speaking with a financial professional is an excellent first step. They can discuss your financial goals and risk tolerance and review the options that match your needs. Plus, you’ll be able to ask questions to better understand how annuities work and what they can bring to your retirement portfolio. Your financial professional can also submit your application and help you handle any necessary paperwork.
Different types of annuities have different degrees of risk, so it’s crucial to find one that fits your risk tolerance and timeline. “The unprecedented volatility in the market over the past few years has highlighted the need to carve out a piece of a portfolio with more dependable income planning strategies,” shares Mechtley. “When you purchase an immediate annuity, fixed annuity, or fixed index annuity, you can feel confident that your money is protected.”
It’s important to research the company issuing an annuity, as all guarantees are based on the claims paying ability of the issuing insurance company. Signs of strength like ratings form third-party agencies can help indicate that a company is stable. A variable annuity has market exposure, so you could lose money if there’s a market drop. Annuities are considered safe insurance products that can provide growth potential and reliable income to your retirement portfolio.
Annuities are designed to provide guaranteed income, so taking early withdrawals can come with withdrawal fees, surrender charges2, and tax penalties. Immediate annuities do not typically offer withdrawal options, but you can access money from a deferred annuity depending on the product. Withdrawing money during the surrender charge period could lead to surrender charges, and prior to age 59 ½, may be subject to IRS penalties or taxation. Some annuities offer additional flexibility around withdrawal allowances.
Many annuities offer a death benefit so you can designate a beneficiary to receive your annuity payment(s) if you pass away. Your beneficiary commonly has options for receiving annuity payment(s), including a lump sum or gradual payments over time. Some contracts also offer spousal continuance, where your spouse becomes the new owner of your annuity.
As you discuss your financial goals and your vision for retirement, you’ll likely have questions your financial professional can help answer and provide further guidance. Consider including these questions in your conversation:
Adding an annuity to your retirement strategy can be a beneficial way to bring growth potential and guaranteed income to a holistic financial plan. If you’re interested in turning retirement savings into a guaranteed income stream, certain annuities, such as fixed index annuities, can help offer financial security and help ensure you have guaranteed income in retirement.
1 Under current law, annuities grow tax deferred. An annuity is not required for tax deferral in qualified plans. Annuities may be subject to taxation during the income or withdrawal phase. Neither North American Company for Life and Health Insurance, nor any financial professionals acting on its behalf, should be viewed as providing legal, tax or investment advice. You should be advised to rely on your own qualified tax professional.
2 A surrender during the surrender charge period could result in a loss of premium. Surrender charge structure may vary by state.
Fixed index annuities are not a direct investment in the stock market. They are long term insurance products with guarantees backed by the issuing company. They provide the potential for interest to be credited based in part on the performance of specific indices, without the risk of loss of premium due to market downturns or fluctuation. Although fixed index annuities guarantee no loss of premium due to market downturns, deductions from the accumulation value for optional benefit riders or strategy fees or charges associated with allocations to enhanced crediting methods could exceed interest credited to the accumulation value, which would result in loss of premium. They may not be appropriate for all clients. Interest credits to a fixed index annuity will not mirror the actual performance of the relevant index.