Annuities are extraordinarily popular today, but they’re not new.
Today, the uses of annuities are more peaceful – and more complex. Understanding annuities, however, can be made easier with a quick review of their essential features and benefits.
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What are annuities?
In today’s retirement planning context, annuities let you match up investment, income and legacy options with your retirement goals.
income for life
Professionally managed investment options
The Power of Tax-Deferred growth.
As the chart below shows, over the 20-year period, a $100,000 investment, earning 4% tax-deferred returns, will grow to $219,112 over 20 years. That´s nearly $39,000 more in earnings.
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CHOOSING AN ANNUITY: THE FIVE BASIC TYPES
Fixed annuities are retirement contracts built on protection and guaranteed returns, including a guaranteed minimum interest rate. They offer guaranteed retirement income for a set period and, depending on the product chosen, may provide guaranteed return of initial investment at anytime and provide death benefit protection.
Index annuities combine the benefits of a traditional fixed annuity, including guaranteed minimum interest, with the potential to earn additional interest linked to the return of a market index. In addition to the benefits of a fixed annuity, owners have the flexibility to build their plan to meet individual needs.
Often, fixed annuities are deferred. Immediate annuities, however, are a popular choice for people already in retirement because it guarantees lifetime income with a single lump-sum payment. Contract owners can choose to receive income payments for life, or a shorter period of time. Payments are based on a fixed interest rate and can be paid out monthly, quarterly, and yearly.
Hybrid annuities combine the advantages of fixed annuities, fixed index annuities and immediate annuities. The hybrid also shares some of the features of a variable annuity as well. In addition to the benefits of the other annuities, the hybrid provides more flexibility to start, and also stop the flow of monthly income. Hybrids also provide liquidity that could be used for income and cash flow in retirement.
Variable annuities offer a range of investment choices through sub-accounts that include stocks, bonds (or a blend of the two) and fixed account options. The withdrawals you eventually make from your variable annuity contract will be based on the value of the underlying investment choices you select. In addition to investment choices, variable annuities typically provide optional benefits for an additional charge. These can include: guaranteed minimum income even if stock markets decline, the ability to increase your retirement income by potentially locking in market gains and enhanced benefits for beneficiaries.
Variable annuities involve investment risks and may lose value. An annuity is a long-term, tax-deferred investment designed for retirement. Earnings are taxable as ordinary income when distributed and, if withdrawn before age 59½, may be subject to a 10% federal tax penalty. Annuities may not be suitable for some investors; they have early surrender charges and may limit yearly distributions to 10% of the contract value.
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TradeWell Tax & Financial has a wide variety of professionals in-house to help the families we serve reach retirement in the most successful way possible.
Who’s right for
An annuity could be a good choice if you want to:
- Increase your tax-deferred earnings, and may be already taking full advantage of all available 401(k), IRA or other tax-deferred plans 100% 100%
- Receive guaranteed income1 for life or a set period of time. 100% 100%
- Create a plan with flexible investment, income and legacy choices. 100% 100%
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About Mike Albertson
The Founder and CEO of Tradewell Tax & Financial, Mike is also a fee-based Investment Advisor Representative and Fiduciary who is required to put his clients’ interests before his own. In 2002 Mike entered into the financial services sector as a way to learn about people and help them.