Annuity

Most people think of commercial annuities when they are discussing what an annuity is in general. Therefore, for the purposes of our discussion here, we will talk about commercial annuities, which are offered to the public by insurance companies.

An annuity is a tax-deferred savings vehicle that credits account growth in various ways and pays out in various ways. The simple breakdown in annuities follows a binary path. When it comes to how they grow in value, annuities are typically either:

  • fixed
  • or variable

A fixed annuity typically does not go below the value of the cash invested and earns interest usually through some kind of fixed mechanism.

A variable annuity (VA) contains options that allow the policy owner to invest in stock “funds,” bond “funds,” or other types of investments that involve market risk. Some VA’s offer a fixed option inside the contract too.

When it comes to how an annuity pays out, it breaks down to either:

  • An immediate annuity
  • Or a deferred annuity

An immediate annuity begins paying a monthly income in exchange for control of principal given to the insurance company. In other words, hypothetically, you give the insurance company $100,000, and they give you $750/month for the rest of your life. It’s like taking a pension (under generic financial definitions, a pension is an “annuity”).

A deferred annuity grows tax deferred and earns interest either through some kind of fixed mechanism or a variable (market) mechanism as mentioned above.

So in summary, you can have:

  • a deferred fixed annuity
  • a deferred variable annuity
  • an immediate fixed annuity
  • an immediate variable annuity

There are other subsets of annuities that we will not explore too deeply here. For example, a Fixed Index Annuity (FIA) is a fixed annuity but earns interest through some quasi market mechanism. However, unlike variable annuities, these will not lose value and tend to lock in any gains yearly. These programs vary so much from company to company that an analysis here would be tiresome.

The Purpose of an Annuity

Annuities are meant to, and motivated by the tax code to supplement retirement income. Some rules of thumb are that if you max out your 401k and an IRA, then an annuity can supplement. However, today’s higher limits on retirement plan contributions make this motivation to use annuities remote (very few people can put $16,500 into their retirement plan, then another $5,000 into an IRA on a yearly basis).

Therefore, annuity companies had to come up with other reasons and new purposes to own these things. In the past 10-15 years, we have seen annuity companies issue various riders and benefits on policies offering guaranteed income, guaranteed withdrawal, lifetime income, and principal protection.* Whether or not any of these options would be of benefit to you is a case by case analysis.

Don’t Know What to Do?

If you have an annuity and don’t know what to do, give me a call. We have helped people in many situations like this. If you would first like some questions answered give us a call - 781.393.0021 or send us a quick contact and we can go from there. Thanks for stopping by!

For more information about Chris Grande, click HERE.

For more information about Walnut Hill Advisors, LLC, our process and navigating information around this website, click HERE.

Please sign up for our weekly mail summary – you get one consolidated summary of all of my weekly articles from Walnut Hill Advisors, LLC and from my personal site ChrisGrande.com where I go over various financial/economic topics and discuss their impact on you and your planning at the personal level.

For example, things are going on worldwide that seem so big as to be above our heads: Fed money printing, deficits, tax policy – count on me to help you understand what it means to you.

Also, be notified early about seminars and workshops that I conduct where you can come, ask questions, and learn more. In order to get all of these benefits, sign up by clicking HERE – Insiders’ Club - no obligation, and cancel the email anytime.

Notes:

*Guarantees offered by insurance companies are based on the claims-paying ability of the insurers and are not government or FDIC guaranteed in any way

See our disclaimer HERE