Annuities

Annuities: Too often misunderstood

I often refer to options as the orphaned investment because brokers do not understand them therefore they are not promoted. They are misunderstood by too many that think they know all about them. Fact of the matter those that talk bad about them probably have never traded them.

Same ideals for Annuities. Very misunderstood by misinformed individuals that continue the “myths”. This is not the space to go into the myths. You can conjure up your own rather this is a time to set facts from fiction.

Most retirees end up owning annuities. They think they don’t, but in fact they do. Once you finish with this report, you realize that more than you think are in Annuities.

Social Security although terribly run is an annuity. So anyone that receives Social Security belongs to the largest annuity. Lottery winners if they do not take a discount in lump some are taking an annuity. Most pensions and state retirement systems use payouts in annuities.

So now that we know most retirees without them realizing it are into annuities, why don’t we discuss what they are.

Annuities have two components.
1)The accumulation phase this is where you place your money into an account for later use. 401k, IRA’s etc although not technically speaking as annuities, they can be used for the accumulation phase. Annuities can and do accumulate tax deferred. AND there is no cap on how much you can put in with after tax dollars.
2)Annuity phase or more often referred to as the “Annuitant”. This is the distribution phase where the annuitant receives payments.

Once you receive your first payment from SS or a pension or an annuity, you cannot change it. Why? Because the calculations are based on actuarial numbers. For those that do not understand this, it simple means that the average person will live to be “X” years. Based on how much is in your accumulation account and how long you are expected to live and how much return on the money, you get a check for that amount. For the set time or the set amount

Advantages of Tax Deferred Annuities

1. Tax Deferred Growth. The interest earned is not taxed until it is touched. Your funds grow tax deferred.

2. Safety. Annuities are among the most guaranteed and safe investments available.

3. Avoid Probate. Annuities transfer to a beneficiary without the need for probate.

4. Income. At any time, annuities can change from a savings or accumulation vehicle to an income vehicle. Annuities can provide an income that cannot be outlived.

5. Estate Planning. Annuities are used in estate planning to help protect assets in the event of a long-term care
situation.

6. Interest Income. Interest is available for income any time after the first 30 days of the deposit. The interest can be withdrawn monthly, annually, or quarterly.

7. Death Benefit. Your beneficiary always receives the full account value from the annuity immediately.

8. Fees. No contract fee or sales commissions.

9. Comparison. Interest rate on annuities is usually higher than bank CD’s or other fully guaranteed products.

10. Access. Unlike bank CD’s, you have access to your funds during the interest earning time period.


Disadvantages of Tax Deferred Annuities

1. Penalty for early withdrawal. During the guaranteed
period, if you withdraw more that the contract allows, a penalty is imposed. This penalty can be voided by using the contract as an income (annuitization) or death.

2. Early Access. Any access to funds is a tax deferred
annuity before age 59 1/2 can be subject to a tax penalty of 10%.