Annuities are popular retirement savings vehicles.
Chances are you’ve heard many—possibly conflicting—
opinions about them. To give you a better understanding
of annuities, here is a brief overview of what they are, why
you should consider them, how they work, and if they are
right for you.
As defined by the Securities and Exchange Commission (SEC), an annuity is: “A contract between
you and an insurance company that requires the insurer to make payments to you, either
immediately or in the future.”1
You buy an annuity by making either a single payment or a series of payments.
payout may come either as one lump-sum payment or as a series of payments over time.
The premise is straightforward—you buy an annuity, and the insurance company, depending on
the performance of the underlying investment, provides a return. Pretty great, huh? But there
are some things to consider before you invest.
Reasons to consider an annuity
Lifetime income - Periodic payments, an appealing aspect of an annuity,
complement other retirement income sources like 401(k)s, Social
Security and pension plans by providing a reliable stream of
income for a set period, often the remainder of your life.
Income options -
There are various income payment options. These may include
lifetime payments, lifetime payments with 10 period certain
benefit, as well as with rights of survivorship, which
are payments that extend over your lifetime and your
Tax-deferred growth -
Similar to an IRA, you pay no taxes on your annuity’s
investment gains until you withdraw money from it. You invest
tax-free, and then withdraw money at a lower tax bracket in
retirement. Unlike an IRA however, there is no limit to how
much money you can invest into an annuity.
Annuitization - If you choose to do so, you may assign the entire account /
contract value to a financial institution, and in return, you
receive income for life.
Guaranteed minimum withdrawal/income benefits -
Riders can be purchased to make an annuity more attractive.
For example, you can ask for a minimum withdrawal benefit
if you do not want to annuitize and assign the contract to the
Death benefits -Your beneficiary may be eligible for a substantial payment(s)
in the case of your death.
Not all annuities are the same
The annuity marketplace can be complex, but in general, there are three main types of
annuities that suit a variety of needs and goals.
Fixed annuity - A fixed annuity is the most
straightforward on this list. You
make a payment, or a series of
payments, and the insurance
company promises you a minimum
rate of interest and a fixed amount
of periodic payments in return.
However, since your payment is
fixed, you have no control over how
the insurance company invests
your funds and instead must rely
on the company’s history of making
payments. To ensure you are making
a solid investment, you should check
the insurer’s credit rating.
Variable annuity - A variable annuity is similar to
a fixed one in that you make a
payment or a series of payments.
However, rather than offering a
fixed amount in return, with a
variable annuity you decide where
to invest your money. The annuity
pays you a level of income in
retirement that is determined by
the performance of your investment
choices. Because you’re in control,
you can tailor your investments to
your level of risk tolerance. But of
course, there’s a chance that your
investment selection may underperform
Indexed annuity - An indexed annuity combines
the features of a security and an
insurance product in one. With it,
your payment contains a promised
return that, rather than being based
on investments you choose or on
a fixed rate, is based on a stock
market index, such as the Standard
& Poor’s 500 Index.
In it for the long(er) haul
Annuities are not typically suited to realizing short-term financial goals because they often contain
prohibitive surrender charges for early withdrawals. While these fees reduce over time, the
reduction is gradual. Fees can start anywhere from seven to 20 percent. Also note that surrender
period lengths can be as long as seven to 10 years, so make sure you understand the length of
time during which you won’t be able to reclaim the full amount of your initial annuity purchase.
Yes, there are fees
Fees vary, but as annuities offer more benefits than a typical investment product, their associated
fees can be higher than other products. Be sure to check and compare fees for competing
products, and be clear what you are paying for.
Always talk to an advisor first
Of course, there is much more to annuities than the information presented in this brief overview.
Before investing, be sure to talk with an advisor. By examining your options within the context of
your overall financial portfolio, your advisor can help ensure that you are investing in the vehicle
that best meets your needs.
Important Disclosure Information
The article above was provided to Synovus by eMoney Advisor, LLC, and is used here with permission from eMoney or a third party content provider. eMoney does not provide investment, tax, legal, or retirement advice or recommendations. The information presented here is not specific to any individual's personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. This information was provided for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.
This content is general in nature and does not constitute legal, tax, accounting, financial or investment advice. You are encouraged to consult with competent legal, tax, accounting, financial or investment professionals based on your specific circumstances. We do not make any warranties as to accuracy or completeness of this information, do not endorse any third-party companies, products, or services described here, and take no liability for your use of this information.
"Annuities." U.S. Securities and Exchange Commission. 2011. https://www.sec.gov/fast-answers/answersannuityhtm.html.
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