We do love it when someone refers a family member or friend to us. Sometimes the question is, “How can we introduce them to you?” Well, there are multiple ways but a very easy way is to simply forward them a link to this webpage.
Here are this week’s items:
Portfolio Update: Murs and I have recorded our portfolio update for July 17, 2023
This Week’s Podcast – Annuities or CDs – What You Should Consider
In this Episode of the Secure Your Retirement Podcast, Radon and Murs discuss the similarities and differences between annuities and CDs and the best one for retirement planning. In as much as CDs and fixed index annuities are similar, CDs are best suited for short-term investments, while annuities are best suited for long-term investments.
This Week’s Blog – Annuities or CDs – What You Should Consider
“Annuities or CDs?” is a question many folks are asking because interest rates on CDs are the best they’ve been in a long time. In this article, we’ll cover both annuities and CDs to help you better understand which option is right for your current retirement planning strategy.
“Annuities or CDs?” is a question many folks are asking because interest rates on CDs are the best they’ve been in a long time. In this article, we’ll cover both annuities and CDs to help you better understand which option is right for your current retirement planning strategy.
Wait. CDs? They’re No Good, Right?
We haven’t talked about CDs for a long time. Interest rates weren’t that attractive in past years. Most people were lucky to receive 1% to 2% returns. Clients who want to reduce market risk can, at the time of posting this article, go out and get a 1-year CD at 5.5%, or a 5-year CD at 4.5%.
With returns like this, we have a lot of people questioning why they would put their money into an annuity – especially a fixed annuity.
First, we need to consider putting the funds into the right place for your retirement focused plan. You have a lot of options when investing, including the following three main categories:
You can put your money into growth assets, such as equities, because they have the highest return potential. These assets would include things like ETFs, stocks, and mutual funds.
These funds need to remain in the market for some time and have the risk of volatility. Markets go up and down all the time, and your funds will follow this trend, too. You do have the potential to lose money with equities, but we do have controls in place to limit these potential losses.
If you want to have a good rate of return without the risk of losing money on it, you’re now in the following territory:
These investment vehicles protect you from market losses, so you don’t need to worry about that, but you may earn less with a fixed option.
Easy money access. If you need liquidity, this is the avenue that you’ll want to choose because it gives you access to the money without penalties when you need it.However, you will not receive a high rate of return.
Keeping this in mind, we’re going to expand on the second category, “safety”, because that’s where the discussion of CDs vs. annuities really exists.
Interest Rate Risks of CDs and Annuities
CDs and annuities are the “hot topic” right now. Interest rates have gone up due to inflationary measures and banks are now able to offer better rates on CDs than they have in a long time. The Fed’s goal is to tame inflation, and when it does go down, interest rates will also come down.
If you buy a CD today at 5% and allow it to reach maturity, you can choose to:
Take the money and put it back in a CD
Take the money out and put it into other investments
CD renewals will allow you to buy the CD again at current market rates. It’s very likely that rates will come down and you may have a CD rate of 3.5% or 4% at renewal – or lower. Two years from now, CDs may be 2% or 1.5%.
These lower interest rates are your “reinvestment risk”.
We like the idea of putting a portion of our client’s money into the six-month or one-year CDs, if they know they’ll use these funds in the next year and will need to access them. In the meantime, they will receive a nice return on their investment.
Fixed Indexed Annuities and Their Potential
Fixed Indexed Annuities (FIAs) are driven by interest rates, so just like CDs, the interest rates have gone up in the last year. The key difference between a CD and an FIA is the length of the contract you receive. For an annuity, the term is longer, such as 10 years.
You may receive a 4.5% – 5.5% interest rate on CDs for 1 year or more. Over the past 10 years, FIAs with no riders or fees have had returns of 4% – 6%. Compared to CDs, this range for annuities was much higher.
In today’s market, because of higher interest rates you can receive an FIA that averages 5% to 10% over a 10-year period. However, you may have some years with 0% returns.
How does that work?
Annuities are linked to an index. For example, S&P 500:
S&P 500 rises 10%, so you earn 10%
Next year, the S&P 500 drops over 10%. Since you are protected from market losses in an FIA, you do not lose any money in that year.
Fortunately, FIAs often have many index options that allow you to diversify your potential and gain more opportunity.
We believe FIAs are really a bond alternative, as they are both conservative and protect against risk. Bonds in 2020 – 2022 hurt portfolios more than they helped.
Clients often look to bonds to make 3% – 5%, but FIAs offer:
Greater return opportunities
Principal Protection (protection from market losses)
Of course, if you have money that you want to park for a year and then use the money, put it into a CD and make your 5% return. However, for long-term investments and the potential to make more money, it often makes better sense to go with an annuity.
Annuities are longer-term, but the reward is more consistent. CDs are shorter-term and, while they have their place today, will see rates go back down as inflation falls and interest rates follow.
In our last podcast of 2022, we wanted to look back at the past year and help you find some of the great resources that we provided. We’re going to use this post to wrap up the year and help recap all the great topics that we’ve covered and what you need to know going into 2023.
What are the Best Resources for Taxes?
We’ve done a lot of podcasts and we have a full list of them here for you. However, a few of the podcasts that we would like to direct your attention to are:
Episode 185 – An interview with Steven Jarvis, CPA about the end-of-year tax strategies for 2022. Steven’s concepts are all about all-year tax planning, what to plan for the end of the year, RMDs, Roth conversions, QCDs and so much more. These strategies apply year-to-year with just a few number changes,
Episode 163 – Another one with Steven Jarvis about mid-year tax strategies that you can deploy. The concepts are very similar to episode 185, but one thing we do cover in greater detail is Roth conversions.
Episode 184 – Tax planning should be a part of your retirement plan. In this episode, we tie together retirement and tax planning. We discuss Social Security, taxes, retirement accounts and the benefit of Roth conversions.
Episode 158 – In this episode, we discuss tax planning versus tax preparation. We use this episode to discuss the key differences between planning and preparation, reducing taxes on social security and more.
Episode 161–An episode that revolves around RMDs and QCDs. This is an episode that we recommend anyone 70 ½ or 72 really take a look at. You need to understand the requirements and rules of RMDs and QCDs to avoid potential penalties.
For taxes, these are the episodes that we recommend that you listen to for a better understanding of taxation, requirements and maybe even ways that you can save money in 2023.
However, we also talked a lot about retirement planning this year, and it’s something that we also wanted to provide a guide on finding for you.
What are the Best Resources for Retirement Planning?
Planning for retirement is something people need to begin doing much earlier than they realize. However, the following episodes are ones that we believe are powerful and filled with a lot of great information:
Episode 182 – An episode titled “3 Questions to Ask Yourself About Retirement.” In this episode, we cover “what do we want to do in retirement?”, “do you need professional help with retirement?” and much more.
Episode 180 – Inflation and the federal reserve are two things that are nearly impossible to avoid in the news, online and at the store. In this episode, we answer questions about inflation, what the federal reserve is doing and how to navigate inflation. We talk about active management and how to navigate these situations before and during retirement.
Episode 177 – A major topic of discussion that is growing is the topic of IRMAA surcharges and how they impact your Medicare premiums. We explain how IRMAA works, the different tiers to be concerned about and more about these surcharges. We will be updating this in 2023 and will have a great insert for anyone who wants one (just call us for more information).
Episode 157 – Retirement bucket strategies are something of major importance to us because they help protect your retirement from massive fluctuations. We discuss multiple buckets that make investing simple and include your cash bucket, income and safety bucket and growth bucket. Using these buckets, it’s possible to secure your retirement with less risk.
Episode 146 – An episode that talks about a risk-adjusted portfolio. We discussed your view of how much money you need to lose to lose sleep. We go through asset allocation, individual risk adjustment, safe growth and more in this episode.
When it comes to retirement planning, we truly believe that these are the best podcasts that we’ve had in 2022. However, we do have one more section of resources that we would like to cover:
Annuities are something that we talked a lot about this year, and we want to point you to some of our best episodes on this topic:
Episode 153– Bonds and bond alternatives are something that we’ve seen change a lot in recent years. The old 60% equity and 40% bonds portfolio worked for decades. However, bonds have changed in recent years thanks to inflation and rising interest rates. Bonds have not allowed us to protect portfolios in 2022, so this episode dives into many bond alternatives that work well to offset the risk of the equity market.
Episode 187–An episode where we discuss fixed annuities and why they’re at their best rate in 15+ years. We discuss why inflation works to boost fixed annuities and how the right annuity can provide a lifetime of income to you that is very similar to a pension.
We’re excited for you to review these resources and feel confident about your retirement going into 2023. Of course, we have a lot of great episodes planned for this coming year that we know you’ll absolutely love.
Money accumulation is paramount as you approach retirement. However, high-risk, high-reward strategies may no longer suit your approach, as many retirees become increasingly risk-averse.
If you have savings that you want to grow risk-free, there are some options available to you. CDs, bonds, and money markets are safe, low-return ways to increase your savings over time. But fixed index annuities could provide a much greater return and are entirely risk-free.
In this post, we share the benefits of a fixed index annuity and explain how insurance companies avoid risk while growing your money.
Annuities are complex; however, they can be beneficial to a retirement portfolio if you understand them. That’s why we’ve created our “Annuities – Why Ever Use Them” series, to answer all the common questions about the pros and cons of annuities.
You can watch the video on this topic at the top of this post, to listen to the podcast episode, hit play below, or read on for more…
This post is the fourth installment in the series, so we encourage you to listen to the first three episodes to learn more about annuities. Find them on our Secure Your Retirement podcast, read the posts on our blog, or follow the links below to watch the episodes on our YouTube channel:
As we dive into the details of how annuities work, it can be useful to have a foundational knowledge of different annuity products. For a quick, high-level overview, here are the main types of annuities and their key characteristics:
Immediate annuity: is a quick and simple way to get an immediate income stream. You give money to an insurance company, which redistributes it back to you as income. For example, if you bought a $100,000 immediate annuity, the insurance company could begin giving you $500 a month for the rest of your life.
Deferred annuity: is tax-deferred with some surrender penalties. Deferred annuities can be either variable or fixed and must be committed to for a certain period.
Variable annuity: you can use a variable annuity to invest in the stock market. Typically, variable annuities are used to buy mutual funds. There are fees, and a lot of risk involved as the market can fluctuate and so can your annuity’s value.
Fixed annuity: is tax-deferred with a principal guarantee, so unlike a variable annuity, you cannot lose any money. However, your money can still grow. Fixed annuities can be broken down into two types, traditional and index.
Traditional fixed annuity: similar to a CD, you lock your money in a traditional fixed annuity for a set period at a fixed interest rate. It’s a risk-free way to grow your money.
Fixed index annuity: this grows your money using market links. You may be tied to an index like the S&P 500 or the NASDAQ. You’ll receive a portion based on the index’s performance over an annual point to point reset. This means if you start your annuity on January 1st 2021, how the index performs between January 1st 2021 and January 1st 2022 will determine what interest will be credited to your annuity.
We’re going to focus on fixed index annuities in this post. We’ll break down how insurance companies can guarantee your principal even when your annuity is linked to market performance and explain why it’s a win-win for you and insurance companies.
2. How to earn interest on fixed index annuities
There are two ways to earn interest on a fixed index annuity, either through a cap or a participation rate.
A cap prevents your principal from reducing due to market volatility. So, if you set a cap at 5%, and your annuity’s index earns 10%, then your annuity will only grow up to 5% in that year. However, if the market falls, you cannot earn a negative rate of return, meaning that your money will not decrease below your guaranteed principle or any increases from previous years.
Participation rates are similar, but instead of using a cap, they increase your principal by a percentage of how the index performs. For example, if your index earns 10% and your participation rate is 50%, then you’ll earn a 5% rate of return.
We dedicated an entire podcast episode to explaining how caps and participation rates work in detail. To learn more about earning interest on fixed index annuities, please watch the episode.
3. How insurance companies guarantee your principal risk-free
Caps, participation rates, and a guaranteed principal mean that fixed index annuities can look almost too good to be true, and you may question how they benefit the insurance company.
Some of the most popular questions we get about fixed index annuities are, “If the index drops 20%, does the insurance company have to me back the equivalent of my loss? or “If my cap is 5%, and the index earns 10%, then does the insurance company keep the extra 5%?”
The answer to both questions is no. So how do insurance companies guarantee a rate of return on your principle without putting themselves at risk?
Here’s an example. You have $100,000 to put into an annuity with an insurance company. The insurance company manages billions of dollars and earns 3% on its total assets. They want more people to invest with them, so they try to attract new policyholders with a return rate of 2.5%. This might not be the most attractive rate to all potential investors, so they take the 2.5% and create a futures contract.
A futures contract is a legal agreement to buy or sell an asset at a predetermined price in the future. For example, if you wanted to buy a company’s share at $100, but the current price is $150, you could set up a futures contract to only buy a share when the price hits $100.
In the case of an index fund annuity, the insurance company takes the 2.5% and puts it into a futures contract related to your index. This futures contract might state that if the index increases, then the insurance company will participate. So, if the index goes up, then the insurance company can provide you with your agreed participation rate. However, if the index is down, then that 2.5% is lost, but it has no negative impact on your principal.
Caps work in a very similar way. If your cap is 5%, then the futures contract will expire at 5%. This will give your annuity a 5% rate of return, and the insurance company will not participate above 5%, meaning that they won’t be pocketing any extra money if the index continues increasing.
If the index is down in either case, then neither you nor the insurance company will lose anything, but you won’t earn a rate of return that year. The worst an index fund annuity can do is earn a zero rate of return, but there’s potential to earn a much greater amount, risk-free.
4. Why we recommend fixed index annuities for retirees
Compared to bonds, CDs, and money markets, fixed index annuities are a good alternative to safely accumulate your money. They have no-risk and are much safer than investing in the stock market, but they have more earning potential than lower-rate products or accounts.
We highly recommend adding a fixed index annuity to your retirement portfolio, but only if you understand how they work.
We appreciate that annuities are complex and can be difficult to fully understand. If you have any questions, please reach out to us. We can discuss how annuities can work for your individual retirement plan and answer any further questions you may have. Start by booking a complimentary 15-minute call with a member of our team today.
You may never have considered a fixed index annuity, but is it something you should look at for your retirement plan?
Many people think annuities are too complicated. That’s why throughout our “Annuities – Why Ever Use Them” series, we’ve tried to answer the questions which may have led you to dismiss them in the past.
In this post, we’re focusing on fixed index annuities, specifically how interest is credited on them. We’ll also recap some general advice on annuities, so you can stay informed about how they work and what they can offer.
What are annuities? A quick recap
If you’re unsure what annuities are, how they work and the benefits they offer, be sure to go back to part one and two of our “Annuities – Why Ever Use Them” series. It’s worth understanding the basics before we launch into the more complex areas of deferred fixed index annuities, which we’ll cover in this post.
As a quick recap, here are some key points to be aware of:
Annuities are generally used for one of two reasons: as a safe money alternative or as a fixed source of income in retirement.
There are two main types of annuities: immediate and deferred.
Immediate annuities are when an insurance company sets up an income stream based on your retirement assets.
A deferred annuity is used as both a safe money alternative and an income stream.
Deferred annuities have two types: fixed and variable. We wouldn’t recommend variable, as there’s a risk you could lose money.
Instead, we always suggest declared rate or fixed index deferred annuities.
A declared rate annuity offers a fixed rate of return over a set period; it’s often compared to a bond or a certificate of deposit (CD).
A fixed index annuity is when the rate of interest you earn varies in line with an index, such as the SMP500. This is a great option because you can benefit from upswings in the market without the risk of losing money.
We appreciate that’s a lot of information to take in. If you’re at all confused by how different types of annuities work, we’d encourage you to read parts one and two of the “Annuities – Why Ever Use Them” series.
Alternatively, listen to episode 26 and episode 30 of the Securement Your Retirement podcast, where we cover these topics in detail. They’re available on your usual podcast app or on YouTube.
What is an index cap and how does it affect a fixed index annuity?
Now we’ve covered what you need to know about annuities, let’s continue our conversation about how interest is credited on a fixed index annuity.
In part two of “Annuities – Why Ever Use Them,” we talked about the annual reset and how it relates to the interest you earn. Think of this as a reset point for the interest-earning period; it varies depending on the terms of your contract but usually happens every 12 months.
The beauty of a fixed index annuity is that any interest you earn is guaranteed and will be credited to your account on the annual reset. This then becomes the starting point for the new interest-earning period.
However, there are a couple of other things to note about interest crediting on a fixed index annuity, including the “index cap”.
The index cap is the maximum amount of interest you can earn in an interest-earning period, as a percentage sum. It’s set by the insurance company who controls your annuity and is based on a range of factors, including the overall financial outlook.
To help you understand how an index cap works on a fixed index annuity, here’s a simple example:
You put $100,000 into a fixed index annuity
The insurance company sets a 5% index cap
The index performs well over your interest-earning period and is up 15%
The index cap means you’ll make 5% interest
The interest is credited during the annual reset
You now have $105,000, which is guaranteed and will never fall
This is just a simple example to show you how the index cap dictates the interest you earn on a fixed index annuity. Whether it’s the SMP500 or the NASDAQ; no matter how strongly an index performs, you’ll only earn interest up to the index cap.
It’s worth remembering that you can’t lose money on this type of annuity, even if the index performs poorly or goes negative. Any interest made is guaranteed, so whatever you earn is yours to keep – making a fixed index annuity a powerful way to grow your retirement fund.
What is the participation rate and why does it matter?
Something else that affects the interest you can earn is what we call the “participation rate”. This is a percentage sum, set by the insurance company, which essentially decides how much money you should make from an index.
To show you how the participation rate works and how it affects the interest you’ll earn on a fixed index annuity, here’s a basic example.
Let’s say you pay $100,000 into a fixed index annuity with a 50% participation rate. This means you’ll earn 50% of what your index makes.
So, if an index made 10%, you’d get 5%. If it made 12.5%, you’d make a 6.25% return.
Participation rates vary widely and are one of the first things we look for when finding the most lucrative fixed index annuity deals. Insurers offer lots of different rates, with the majority falling in the 80-90% range, though they can be higher or lower based on a range of factors.
Do you want to put your money in a fixed index annuity? We can help
The world of fixed index annuities can be complicated, with lots of options and things to consider. But if you think this sounds like the right direction to take with your retirement plan, we’re here to help.
Our experts have years of experience in helping people set up and manage a fixed index annuity. And with the potential to boost your retirement assets by a considerable amount, taking advantage of our knowledge and expertise is certain to be worth your while.
We’d also like to reiterate that while annuities may sound complicated, they have been around for a long time, with billions of dollars passing through them each year. Through our “Annuities – Why Ever Use Them”series, we want to get you thinking differently about these products, so you can make an informed decision on where to put your retirement assets.
Are you ready to take the next step on your retirement plan? Book a complimentary 15-minute call with a member of our team to discuss your retirement goals today.
When it comes to your retirement plan, you may have dismissed fixed annuities as overly complicated. But with major benefits to be had, we think investing in an annuity is a conversation worth having.
In this post, we’re taking an in-depth look at fixed annuities, including what they are, how they work, and the different options available. We’ll also walk you through an example, so you can see how this type of annuity could benefit your retirement fund.
An annuity provides income in retirement, either as a stable income stream or as a place to earn interest on your money
People take out annuities for one of two major reasons: income planning in retirement and as a safe place to store money
There are two major types of annuities: immediate and deferred
An immediate annuity is when you give a lump sum to an insurance company, which then distributes it back to you through income-for-life payments
A deferred annuity is a place to invest and store money for your retirement. You can earn interest on the money you’ve invested before withdrawing it as a lump sum or setting up an income stream
There are two major types of deferred annuities: fixed and variable
We always recommend the fixed-rate option, so that’s what we’ll focus on in this post.
If you’d like more information on the basics of how annuities work, be sure to watch part 1 or listen to our podcast episode.
What are the main types of deferred fixed annuities?
If you’re looking for somewhere to store your savings and make money, a deferred fixed annuity could be a good option. This is when you give a lump sum to an insurance company to earn interest on your retirement fund.
There are a couple of benefits to fixed annuities which make them more attractive than immediate annuities. Firstly, the money you give to the insurance company isn’t locked away, so you can access your savings for big purchases, like vacations or home improvements.
Secondly, you’ll earn interest on your investment, giving your retirement pot a significant boost without fear of losing your principal investment.
The amount of interest you earn will depend on the fixed annuity you invest in, with the two main types being declared rate and fixed index. Let’s take a closer look at how these annuities work and what they offer.
Declared rate annuities
A declared rate annuity provides a fixed rate of return over a set period. Think of them like a certificate of deposit (CD), wherein you consistently earn interest in a safe, stable way.
Declared rate annuities are a popular option for those who want to boost their retirement pot with a reliable source of interest. At the end of the plan, you can withdraw your money and walk away or set up an income stream for your retirement years.
Of course, the downside to declared rate annuities is that the amount of interest is fixed, so you’ll never make more than the declared amount. While this does mean reliable earnings, it takes away the opportunity to make money when the markets are up, so you’ll miss out on a potentially higher rate.
Fixed index annuities
Fixed index annuities bridge the gap between fixed-rate and variable annuities, allowing you to benefit from market upswings without fear of losing your principal investment. With this type of annuity, the interest you earn is based on an index, be it the SMP500 or the NASDAQ.
Having your retirement assets linked to the stock market might sound alarming, but the beauty of this type of annuity is that your investment is guaranteed. That means you can take advantage of higher interest rates when the market climbs, without fear of losing money should it fall.
The drawback to fixed index annuities is that when the market is negative, you could make little to no interest over a 12-month period. However, if this is a risk you’re willing to take, the interest you earn when the index goes up will more than likely outstrip that of a declared rate plan.
How is interest credited on a fixed index annuity?
So, how does the interest you earn through an index make its way to your retirement fund? To answer that, we’ll set out a basic example of a fixed index annuity, so you can get an idea of the numbers and timeframe.
Let’s say you invested $100,000 in a fixed index annuity on January 1, 2020. Over the next 12 months, you’ll earn interest based on how the index performs.
On January 1, 2021, the annual reset occurs, and you’ll receive your first statement. This tells you how much interest you’ve earned from the index as a percentage sum.
So, if you made 5% interest, your investment would now be worth $105,000. This is the amount that you start the new earning period with, and it’s guaranteed money that you can’t lose, even if the market declines.
Say, for example, the index performed poorly for the next 12 months; you wouldn’t make any money, but you wouldn’t lose any either. That’s why fixed index annuities can be a powerful way to boost your retirement fund and guarantee a good rate of return over the earnings period.
We understand that the annuities world can be complicated. That’s why we plan to continue this series, walking you through the ins and outs of the different options available.
Remember, if you need any advice or expertise in setting up an annuity for your retirement, our financial specialists are here to help. Book a complimentary 15-minute call with a member of our team to discuss your retirement goals today.
Should annuities be part of your retirement plan? Some would say no, but once you know what they are and how they work, they could be a good option for you.
In this post, we’ll show you what annuities are and the different types available, before looking at ways to make them work for you.
What is an annuity?
An annuity is a retirement product that offers a steady income stream in retirement. They’re designed to provide a source of income for the rest of your life and are typically set up so that you can’t outlive the payments.
You can contribute to an annuity alongside other retirement contributions, like a pension, IRA, or 401k. Think of them like a certificate of deposit (CD) or a bond, whereby you invest a lump sum with the understanding that you’ll be remunerated at a later date.
How do annuities work?
Annuities are a long-term contract between yourself and an insurance company, which guarantees income-for-life payments when you retire. It’s when you give a lump sum of money to an insurance company, which converts it to an income stream that you can’t outlive – providing a lifetime of income.
Here’s how they work:
You pay a lump sum to an insurance company – let’s say $100,000 as an example.
You choose the type of annuity plan you want – there are two major types available, immediate and deferred. Keep reading for more information on the pros and cons of these different options.
You start receiving income-for-life payments – this is either when you reach retirement age or at a time agreed with the insurance company.
Annuities can be complicated and are often misunderstood. But so long as you remember the basics of how they work, they can be a valuable addition to your retirement plan.
Why should you consider an annuity?
There are three key reasons why people look at annuities as part of their retirement plan.
The first concerns guaranteed income. Annuities offer the peace of mind that you’ll receive a reliable income when you retire, and these are payments that will continue for the rest of your life.
The second reason to look at annuities is that they’re considered a safe and profitable place to keep your money. If you choose a deferred annuity plan with a fixed interest rate, you’ll receive a guaranteed rate of return – helping to top up your savings for when you retire.
Lastly, annuities often bring a death benefit, meaning guaranteed money for your loved ones when you’ve gone. Though not one of the main reasons to invest in an annuity, it is a benefit that you may appreciate when thinking about your inheritance.
The pros and cons of different types of annuities
If you decide an annuity is right for you, the next question is: which type should you go for? As we touched on earlier, there are two main types of annuities to choose from, immediate and deferred. Let’s take a look at how they work and the pros and cons they offer.
An immediate annuity is a retirement product that you can access within 12 months of investing. It’s when you give a lump sum to an insurance company, which then distributes it back to you based on a defined schedule or over your lifetime.
The main benefit of taking out an immediate annuity plan is the guaranteed income it provides. It means you don’t have to worry about budgeting your savings, instead you’ll receive regular payments that you can live on through retirement.
One of the downsides of immediate annuities is that they aren’t flexible. As soon as you make a lump-sum payment to an insurance company, you can no longer access it. This could mean you find it difficult to make large, one-off purchases in retirement, especially if you don’t have other assets to rely on.
A deferred annuity isn’t as straightforward. Often compared to a CD or a bond, this type of annuity is a long-term investment where you can store money until you retire.
To further complicate things, there two types of deferred annuities, fixed-rate and variable. A fixed-rate annuity guarantees a reliable rate of return on your investment, while a variable annuity means your investment is subject to the highs and lows of the financial market – meaning you could lose money.
In most circumstances, we’d always advise a fixed-rate plan when considering a deferred annuity. It’s much safer if you’re relying on that money for later life. You’ll also get the benefit of added interest without the worry that you could lose money.
It’s worth noting that with a deferred annuity, you can withdraw money up until the point that you start receiving regular payments. Say, for example, you want the payment plan to begin when you’re 75. You could pay into a fixed-rate annuity before you retire, while still having access to your investment up until the regular payment schedule begins.
How to plan for an annuity as part of your retirement
Arranging an annuity for your retirement might sound complicated, but it doesn’t have to be. Provided you know what your assets are and how much money you’ll need in retirement, an annuity can be a feasible part of your retirement plan.
Whether you opt for an immediate or a deferred annuity, you’ll need a lump sum to give to the insurance company. This money usually comes from income sources like savings, pensions, social security, or the equity released when selling your property.
When deciding how much to invest in an annuity, be realistic about what you’ll need in regular income when you retire. Think about essential costs – to cover things like food, bills, and accommodation – as well as disposable income that will give you the freedom you deserve in retirement.
Financially planning for an annuity can feel overwhelming, but help is available. Our experts will consider your income and show you the options available, creating a customized retirement plan that meets your requirements and goals for retirement.
We hope we’ve cleared up some of the misconceptions you may have had about annuities. If you need help setting up an annuity for your retirement, don’t hesitate to get in touch. Book a complimentary 15-minute call with a member of our team to discuss your retirement goals today.