Retirement planning can seem overwhelming when you are first starting out, but it doesn’t have to be. Understanding your long-term needs and what financial products might work for you is a great place to begin.
What are Annuities and How do they Work?
One option you might consider for income in retirement is an annuity. An annuity is a contract between you and an insurance company designed to assist you in meeting your retirement income goals.
How do annuities work? In exchange for either a single or recurring payment, which is called a premium, the insurance company promises to make a series of payments to you either immediately (an immediate annuity) or at some point in the future (a deferred annuity).
Types of Annuities - Variable, Fixed or Fixed Indexed Annuities?
There are three main types of annuities: variable, fixed and fixed indexed annuities (FIAs). The accumulation of interest helps differentiate between the three.
With a variable annuity, investment returns are earned based on the performance of the investments you choose to put your money in. These investment portfolios can include stocks, bonds and money markets.
However, the return earned by a variable annuity isn’t guaranteed and the value of the chosen investments can fluctuate. You can make money if the value goes up, but you could lose money if it goes down.
With a traditional fixed annuity, interest accumulates based on a fixed interest rate, which is guaranteed for a set period of time and cannot decrease during that time period. That fixed interest rate is determined at the beginning of the contract.
With FIAs, there is an accumulation of interest based on the performance of an external index, such as the S&P 500® index. FIAs can offer growth potential, including principal protection from index volatility. This is beneficial because interest can never be lost once it is credited to the annuity contract.
FIAs can offer additional benefits, including tax-deferral and guaranteed lifetime income.
Why should I Buy an Annuity?
A study by the Insured Retirement Institute and American Equity shows more than half of near-retirees believe they will need more than twice what Social Security provides to make ends meet. This indicates a larger demand for guaranteed lifetime income, with fixed index annuities leading the way as 85 percent of near-retirees indicated they would likely purchase a financial product described as a fixed-indexed annuity.
The Center for Retirement Research at Boston College publishes the National Retirement Index. The index analyzes where Americans stand in retirement preparedness and where they fall short. In 2023, the index showed that roughly half of the nation’s working-age households are at risk of falling short even if they work to age 65.
While addressing that concern, fixed and fixed index annuities have started to become part of planning a balanced retirement portfolio, as more retirees look for benefits like lifetime income.
How Do I Buy an Annuity?
Annuities are sold by licensed insurance agents, some banks, brokerage firms and mutual fund companies. Some agents or companies are dedicated to selling a product from a specific company, while others are considered independent and can sell products from different carriers. Make sure to consult with a licensed financial professional that can explain fee structures and important aspects like potential gains and tax advantages.
Consider reading through this resource from the U.S. Securities and Exchange Commission to find more information about annuities.
Are Annuities Regulated by the Government?
Fixed and fixed index annuities are considered insurance products and are primarily regulated by state departments of insurance. Every state has an insurance commissioner who regulates and supervises the insurance and annuity products sold within their state. Annuity contracts must be filed with and approved by each state where the contracts are sold. Similarly, agents needs to be licensed in all of the states they operate in. One key difference between products is that any agent selling variable annuities has to be registered with FINRA regardless. Note that FINRA registration is not required with product like fixed index annuities.
Your state department of insurance likely provides information about insurance carriers, insurance licensed producers and may provide information about annuity products, as well.
Guarantees are based on the financial strength and claims paying ability of American Equity and are not guaranteed by any bank or insured by the FDIC.
Surrender charges may apply to excess withdrawals that the annual free withdrawal available under the contract. You may be subject to a 10% federal penalty if you make withdrawals before age 59 ½.
Under current tax law, the Internal Revenue Code already provides tax-deferral to qualified money, so there is no additional tax benefit obtained by funding a qualified contract, such as an IRA, with an annuity; consider the other benefits provided by an annuity, such as lifetime income and a Death Benefit. Indexed annuities are not stock market investments and do not directly participate in any stock or equity investments. Market indices may not include dividends paid on the underlying stocks, and therefore may not reflect the total return of the underlying stocks; neither an index nor any market-indexed annuity is comparable to a direct investment in the equity markets.
This material is for informational purposes only, and is not a recommendation to buy, sell, hold or rollover any asset. It does not take into account the specific financial circumstances, investment objectives, risk tolerance, or need of any specific person. In providing this information American Equity Investment Life Insurance Company is not acting as your fiduciary as defined by the Department of Labor. American Equity does not offer legal, investment or tax advice or make recommendations regarding insurance or investment products. Please consult a qualified professional.
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