What annuities are and what annuities are not! How annuities may fit into your retirement plans.
Annuities are contracts between an insurance company and the owner. The owner pays a premium to the insurance company in return for some contracted guaranties by the insurance company to the benefit of the owner. Annuities are guaranteed by the financial strength and reliability of the issuing insurance company. Traditional fixed annuities were not designed to be an investment to compete with real estate or the stock market, rather they are a safe savings vehicle with interest credited to the benefit of the owner that accumulates value over time. Annuities are not for everyone. When considering an annuity, ask 2 basic questions:
What do you want the annuity to do?
When do you want it done?
Annuities may not be as liquid as some other savings methods, but may offer a higher yield on your savings. Annuities can have a contract term as short as 2 years and as long as life. Annuities are typically divided in two phases:
- First, the accumulation phase in which the value of your savings grows, tax deferred, until withdrawal.
- The Second, is the payout phase, which can be in a lump sum or equal payments for a specified number of years or for life.
Retirement Financial Planning
The fundamental objective of every retirement financial plan is to ensure sufficient resources are available for a comfortable retirement. The trick, though, is determining exactly what is “sufficient” and figuring out how to get there. We don’t all retire at the same age. We don’t all have the same expenses. And, of course, we don’t all live to the same age. As medical treatment and technology have improved and life expectancies have increased, longevity risk – the risk of outliving your retirement savings – has become an increasing concern in retirement planning.
At the same time, private pensions have become exceedingly rare. Sure, there’s Social Security, but it’s frequently insufficient to meet all regular expenses. A retirement plan needs to include an additional, reliable income source to make up the difference.
Annuities are a financial product specifically designed to address longevity risk by providing a predictable income stream guaranteed for life. Although they are not a new concept, modern annuities adapt a proven retirement-planning tool to the modern economy, allowing individual retirees to choose an annuity suited to their individual financial situation, needs, and priorities.
With traditional life annuities, the payments are guaranteed for life, like a private pension you purchase for yourself.
The primary (but by no means only) purpose of annuities in financial planning is to ensure an adequate and consistent, life-long income stream – thereby insuring against longevity risk.
For this reason, and, because an annuity’s value grows over time, tax deferred, it also acts as a savings or accumulation vehicle. Annuities are highly customizable and can vary considerably between insurance companies and even between specific annuities. The secret is to find the specific annuity with features that best fit your specific situation, structured to meet your individual needs. With new and advanced software to analyze available products, the process is simplified and less time consuming. We offer a free tool to help you compare available annuity options with rates, income quotes and carrier ratings. Click here for access.
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