Annuities: Key Things to Know
Discover the essential facts about annuities, including how they work, the different types available, and how they can secure your financial future in retirement.
An annuity is a financial product designed to provide a steady income stream, typically during retirement. When you purchase an annuity, you make a lump-sum payment or series of payments to an insurance company. In return, the insurance company commits to making periodic payments to you, either immediately or at some point in the future. Annuities are often used as a tool for ensuring a stable income in retirement, helping to manage longevity risk, and providing peace of mind.
Fixed Annuities
Multi-Year Guaranteed Annuities (MYGAs)
MYGAs offer a guaranteed interest rate for a specified number of years, making them an attractive option for conservative investors seeking growth of their money with stability prior to taking a reliable income stream. With a MYGA, you can predict your growth over the term of the annuity
Fixed Index Annuities (FIAs)
Fixed Index Annuities are designed to offer the security of a fixed annuity while also allowing for growth potential linked, in part, to the performance of a stock market index, like the S&P 500. While your annuity is credited interest based on the performance of the index, your principal is protected from market downturns.
Income Annuities
Immediate Annuities
With an immediate annuity, you start receiving payments almost immediately after your initial investment. This type of annuity is ideal for retirees looking to convert a lump sum into a steady income stream that begins within a year of purchase.
Longevity Annuities
Longevity annuities, also known as deferred income annuities, are designed to provide income later in life, often starting in your 70s or 80s. These annuities help protect against the risk of outliving your savings by ensuring you have a source of income in your later years.
Qualified Longevity Annuity Contracts (QLACs)
QLACs are a specific type of longevity annuity that can be purchased within a qualified retirement plan like a 401(k) or IRA. QLACs allow you to defer required minimum distributions (RMDs) until as late as age 85, offering tax advantages and income security in your later years.
Annuities are increasingly being offered as an option within workplace retirement plans, such as 401(k)s. These annuities allow employees to convert their retirement savings into a steady income stream upon retirement. Employers may offer annuities as part of their retirement benefits package, helping employees secure lifetime income and reduce the risk of outliving their savings. Including annuities in workplace retirement plans can simplify retirement planning by integrating income security directly into the retirement savings process.
While both annuities and life insurance are products offered by insurance companies, they serve different purposes:
Annuities
Annuities are designed to provide income during your lifetime, particularly in retirement. They help manage the risk of outliving your savings by ensuring a steady income stream.
Life Insurance
Life Insurance provides a death benefit to your beneficiaries after you pass away. Its primary purpose is to offer financial protection to your loved ones, covering expenses such as funeral costs, debts, or income replacement.
In summary, annuities focus on income during life, while life insurance is about protecting your loved ones after death. Depending on your financial goals, you might consider incorporating both into your overall financial plan.
Pros of Fixed Annuities (MYGAs and FIAs)
- Guaranteed Growth: MYGAs provide a guaranteed interest rate, ensuring steady growth.
- Principal Protection: FIAs offer protection from market losses while still allowing for growth potential.
- Predictable Income: Fixed annuities can provide a reliable and predictable income stream, which is crucial in retirement planning.
Cons of Fixed Annuities (MYGAs and FIAs)
- Limited Growth Potential: MYGAs have a fixed interest rate, which may be lower than other investment options.
- Complexity: FIAs can be complex, with varying caps, spreads, and participation rates that affect returns.
Pros of Income Annuities (Immediate, Longevity, QLACs)
- Known Income: Income annuities guarantee your income at purchase, so you know what it will be -- whether starting immediately or at some point in the future.
- Simplicity: Immediate annuities offer straightforward income generation, without the need to manage investments.
- Tax Deferral: QLACs allow for deferral of RMDs, potentially reducing taxable income in retirement.
Cons of Income Annuities (Immediate, Longevity, QLACs)
- Irrevocability: Once purchased, income annuities typically cannot be changed or cashed out, limiting flexibility.
- Inflation Risk: Since longevity annuities start your guaranteed income in the future, the payments may lose some of their value due to inflation unless you choose an inflation-protected option.
As you approach retirement, the need for a reliable income stream becomes increasingly important. Annuities can play a crucial role in ensuring that your retirement savings last as long as you do. By converting a portion of your savings into an annuity, you can create a guaranteed income stream that covers your essential expenses, giving you peace of mind. MYGAs and FIAs offer growth with protection, making them suitable for those seeking both security and growth potential.
For those already in retirement, annuities can help manage the risk of outliving your savings. Immediate annuities provide a simple solution for converting a lump sum into a predictable income stream, while longevity annuities and QLACs offer the assurance of income starting in your later years. By incorporating annuities into your retirement plan, you can create a balanced and secure financial future, ensuring that your retirement years are as comfortable and stress-free as possible.
At Blueprint Income, we specialize in helping you navigate the complexities of annuities, ensuring you find the right product to meet your retirement goals. Explore our range of annuity options and start planning for a secure retirement today.