Many desire financial independence in retirement but often have concerns about outliving their money. One strategy that can help provide confidence is annuities. This article provides a roadmap to annuities for those considering purchasing one.

Understanding annuities

Annuities are financial products offered by insurance companies that provide a steady stream of income that one can’t outlive. Annuities are designed to provide a dependable source of income over a specific period or for life. There are two primary types of annuities – immediate and deferred.

  • Immediate— With an immediate annuity, payouts start when one purchases it.
  • Deferred—A deferred annuity allows the invested money to accumulate before payouts begin. This growth period can range from several years to decades.

How annuities accumulate value

Annuities can also be fixed, fixed-indexed, and variable, impacting the accumulation.

  • Fixed annuities- accumulate at a guaranteed rate and provide fixed payments.
  • Fixed-indexed annuities- accumulate value based on the performance of an investment portfolio and have a sub-account that pays a fixed rate.
  • Variable annuities- the returns mimic market performance, depending on the underlying investments.

Annuities come with risk

Both have pros and cons. Fixed annuities provide a sense of security but a lower accumulation rate. Fixed-indexed annuities offer higher returns in the indexed portion of the policy but with a higher degree of risk.

Understanding these different annuities, their benefits, and their risks is the first step on the beginner’s roadmap to financial independence. Their choice depends on individual risk tolerance, income requirements, and retirement goals.

How much to invest in an annuity

The second pivotal step is determining how much to invest in an annuity. The decision should be based on current income, anticipated post-retirement expenses, and retirement savings. It’s advisable that investors diversify their retirement savings investments and not put all of them into a single product. A financial or insurance professional can help you determine an appropriate retirement portfolio mix and risk for your situation.

Selecting an insurance company and annuity product

Selecting an insurance company is of equal importance. Before purchasing an annuity, it is essential to research and compare the financial strength of different insurance companies and the terms and conditions of their annuity contracts. Consulting with a professional may provide additional guidance to help avoid pitfalls.

Taxes and fees

It’s essential to consider the taxes and fees linked to annuities. Annuities gain tax-deferred growth, meaning you don’t pay taxes on the earnings until you start receiving payments. However, any withdrawal before age 59 1/2 may result in a 10% IRS penalty for early withdrawal and income tax. Moreover, annuities often have various fees, such as surrender charges, management fees, and insurance charges, which can reduce returns.

In conclusion, annuities can be a valuable tool on the journey toward financial independence, providing a steady income stream during one’s golden years. However, potential investors should approach annuities with a complete understanding of their intricacies, the implications of purchasing one, and how it fits into their overall financial strategy.

SWG4312451-0325a This information is provided as general information and is not intended to be specific financial guidance.   Before you make any decisions regarding your personal financial situation, you should consult a financial or tax professional to discuss your individual circumstances and objectives. The source(s) used to prepare this material is/are believed to be true, accurate and reliable, but is/are not guaranteed.

An annuity is intended to be a long-term, tax-deferred retirement vehicle. Earnings are taxable as ordinary income when distributed, and if withdrawn before age 59½, may be subject to a 10% federal tax penalty. If the annuity will fund an IRA or other tax qualified plan, the tax deferral feature offers no additional value. Qualified distributions from a Roth IRA are generally excluded from gross income, but taxes and penalties may apply to non-qualified distributions. Consult a tax advisor for specific information.

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