What is an Annuity?
Annuities are contracts with insurance companies, involving an investment which can be a source of retirement income.
- Annuity values accumulate without being taxed until you decide to withdraw money. When you withdraw money that withdrawal is countable for tax purposes.
- Your money can grow much faster in an annuity than a taxable investment yielding the same rate because you have the power of "triple compounding". You earn interest on you principal, interest on the interest, and interest on the money that you do not pay taxes (if you are in a higher tax bracket, this could be a big difference).
- Most will avoid the publicity and hassles of probate. The value of you contract is left to beneficiaries in a lump sum or as an income for a specified period or life. Note that all contracts are not identical and some pay out options are restricted.
- There are many choices with annuity types. If we can assist you with any of these ideas or if you would like to discuss this further, please contact us.
Types of Annuities
Tax-Deferred
- A tax-deferred annuity provides an additional long-term tax-deferred savings opportunity to help you prepare for your retirement years-with the opportunity to generate an income stream in retirement.
- Offer safety with potential for higher gains. Guarantees a minimum interest rate and allows you the potential of any market-linked growth without the potential of any market-linked loss due to economic downturns.
- Ideal for conservative investors such as CD's or fixed annuities.
- Some products will give bonus points that cannot be taken away.
- An income annuity can help cover your essential expenses and create a pension-like stream of income for a certain period of time or the rest of your life. It is also the only product that can guarantee retirement income for life, by converting a portion of your retirement savings into a reliable income stream that you can't outlive.
Example:
A 58 year- old man wants to save more for his retirement. He deposits $100,000.00 into a bonus equity-indexed annuity. He receives a bonus of 10% and then is allowed to index in the market. His contract value is now $110,000.00 regardless of what the market does that year.
He can index the contract into several indices including the Dow Jones, S&P 500 mid caps, and S&P 400. Let's say that he decides to put $110,000.00 into the Dow Jones index. That index is at 8000 on that date and 1 year later it is at 8800. That is a gain of 10% less whatever the margin is (or fee). Lets say the margin is 2%. His net gain was 8% taking his account value to $118,800.00.
He is locked in that level regardless what happens in any future contract years. Obviously, your contract would be different if you took any withdrawals.
Most contracts will offer you the ability to take out 10% penalty free each year!
With an annual reset provision, if he decides to do the same thing the
following year and the experiences a correction and falls from 8800 to
7900, he loses nothing! He remains at $118,800.00. Then in the next year
he can participate when and if the market experiences a correction coming
back up because he reset at the lower point (7900)!