At ABB Wealth Strategies, we understand better than most that annuities and retirement planning, in general, can be confusing. Therefore, we aim to give you as many answers upfront before you meet with us so you can spend your time as productively and efficiently as possible. Below are some of the most common questions regarding annuities we get from our clients.
An annuity is a long-term agreement between an individual and a regulated insurance company. The individual makes regular payments (or a lump sum payment) to the insurer in exchange for payments made at regular intervals starting at a predetermined date. There are three main types of annuities; fixed, fixed index, and variable annuities.
When you enact an annuity, the payments you make to the insurance company accrue value over time through interest or index performance, depending on which plan you choose.
A tax-deferred annuity is simply an annuity that grows in value tax-free until you reach the distribution phase, at which point it will incur the applicable taxes.
Like with 401(k)s or IRA plans, early withdrawals can result in penalties and additional fees. However, many annuities allow you to withdraw up to 10% of your account balance each year with no surrender charges.
The economic context of the times has changed. Today’s workforce does not have the benefit of pensions or relying on Social Security payments in the same way previous generations could. Annuities are an excellent option for anyone planning for retirement and looking for a reliable income stream free of the risks and volatility of the stock market.
One of the key differences between an annuity and other retirement options like IRAs is that annuities do not have an annual contribution limit. For this reason, annuities are ideal options for those who want to exceed the IRS contribution limits and add a new source of retirement income.
Many retirement plan options like IRAs and 401(k)s rely on market performance to secure their value. Although these can be effective retirement strategies, if you do happen to reach retirement age in the middle of a recession, period of high inflation, or market crash, your money will suffer. Annuities offer secure and reliable income that is guaranteed by a contract between you and an insurance company.
When it comes to retirement, the more revenue streams, the more secure you'll be. Although annuities guarantee your income and can be used as your sole means of financial sustenance, you’ll enjoy more benefits if you have multiple ways of receiving retirement income.
However, no other form of retirement planning guarantees your income – therefore, be it as a supplement to an existing retirement plan or as your primary option, annuities are a must for anyone wishing to retire comfortably.
The only type of annuity that does not pass on the inheritance to your heirs is a “life-only” annuity. Most other annuities will continue to make regular payments to whoever you designate as a beneficiary after your passing until the terms of the annuity are met.