Annuities

Annuities

Annuities can be an important part of investor’s retirement plan because they create a stream of income which directly contributes to your ‘retirement paycheck’. With the dramatic decline over the past 30 + years in the number of employers that offer pension plans, many investors realize that their sources of reliable income have narrowed. For some, this creates a worrisome gap in dependable income to fund essential needs in retirement. One way to help mitigate this concern is with an annuity, which is similar to building your own pension.

An annuity is a contract between you and an insurance company. You agree to make a payment or series of payments to the insurer, who in turn guarantees* specified payments back to you when you determine you need them to start. The guarantees are as strong as the underlying company.

Some of the advantages of annuities include:

  • Providing the investor with tax-deferred growth
  • No limit to the amount you can invest in an annuity unlike the other well-known tax-deferred vehicles such as traditional IRAs
  • A stream of income in retirement (which is dependent upon the underlying strength of the insurance company) which offers some level of confidence to the investor that the annuity stream will continue in retirement.
  • Most annuities offer annuitization options so the investor may designate someone that would continue to receive the monthly payments upon their death.

Some of the disadvantages of annuities include:

  • Earnings are taxed as ordinary income when withdrawn, not capital gains
  • Early withdrawal tax penalty may apply if gains are withdrawn before the owner turns 59 ½
  • Surrender charges typically apply for early termination
  • No step-up in cost-basis. Beneficiaries pay ordinary income taxes based on their tax bracket

Although most investors consider an annuity for the stream of income they receive in retirement there are other reasons why someone invests in an annuity. For example, an investor may purchase an annuity to insure they have a way to pay for long term care insurance in case that becomes necessary for them. Insurance companies are always developing annuities with a variety of different benefits so no matter a person’s need there is most likely an annuity that could help provide the investor some level of coverage.

Like all investment strategies, an annuity should be considered with your entire portfolio in mind along with your short and long term goals, your age, etc. Let’s set up a time to meet to discuss annuities and other investment tools so you know there is a plan in place with the optimal investment tools for you.


*Guarantees are based on the claims-paying ability of the issuing company.

Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation.