Annuities: What They Are and How They Work

Having enough retirement income is a top concern for many Americans nearing or in retirement. Even though they may have saved consistently throughout the working years, they may be concerned that their retirement plans will succeed. A successful retirement plan provides the ability to maintain your lifestyle for the duration of your life.

Having enough retirement income for what you need and want is essential and must be planned for, even in the best economic conditions. A way to provide income safety is by using annuities as an asset class in your retirement portfolio.

Annuities Provide Safety and Income- Annuities help retirees address a specific retirement planning risk- Longevity Risk. Longevity Risk is the risk that a retiree outlives their financial assets. Here are other things to know about annuities:

• Annuities are designed to provide income for your life.
• Due to their safety and growth potential, many portfolios use annuities in the financial services industry as an asset class.
• Annuities are contractual agreements with an insurance company that provide an investor with a guaranteed income stream during retirement in exchange for a premium.
• Insurance companies provide products such annuities to help individuals manage their long lives.

Annuities offer tax-deferred growth of earnings, protection of principal, and a guaranteed lifetime income. The three types of annuities widely used in financial planning are fixed annuities, fixed-indexed annuities, and variable annuities. Like any financial product, there are pros and cons to each type, and due diligence in investigating any annuity should take precedence before purchasing one for your retirement portfolio:

Variable Annuities- Tax-deferred growth opportunities, but with the risk of principal loss.

• Potentially Greater Growth.
• Designed to provide a guaranteed income for your life.
• No Principal Protection.
• Market-type returns are based on the asset class in the portfolio.
• Invests in a selection of investment options.
• Tax-deferral benefit for non-qualified investments, not applicable to IRAs, 401(k), TSP, etc.
• Limited Investment Choices in Comparison to the Universe of Mutual Fund Choices.
• Fees Can Range from 3% to 5%., or more.

Variable annuities can be expensive and come with many fees, which decreases the accumulation value. Variable annuities are market sensitive and may incur a loss to the investor. Many times, the investor needs to understand this complex product. Working with a financial professional to know if a variable annuity is appropriate for your situation is essential.

Disclosure: Variable annuities are sold by prospectus only. Investors should carefully consider objectives, risks, charges and expenses carefully before investing. The contract prospectus and the underlying fund prospectus contain this and other important information. Investors should read the prospectus carefully before investing. For a copy of the prospectus, contact your financial professional.

Fixed Annuities- Provides growth opportunities with income for life and offers principal protection.

• Principal Protection- original principal plus all credited interest is guaranteed.
• Growth- a fixed rate for a declared period.
• Tax-Deferral- a benefit for non-qualified assets, not applicable to IRA, 401(k), TSP, etc.
• No Fees on Base Product
• Designed to provide a lifetime Income

Before purchasing a fixed annuity, investors should work with their financial professionals and consider the issuing company’s rate, terms, ratings, and service levels.

Fixed-Indexed Annuities- Provides growth opportunities with income for life and offers principal protection.

• Principal Protection- original principal plus all credited interest is guaranteed.
• Growth- credited interest tied to index performance. Some products offer uncapped strategies—an inflation hedge on the portfolio.
• Tax-Deferral- a benefit for non-qualified assets, not applicable to IRA, 401(k), TSP, etc.
• Provides guaranteed income for life.
• Inflation hedge- growth is designed to increase when prices are appreciating.

Investors should consider the fixed annuity index, participation rates, and service levels of the issuing company before purchasing a fixed-indexed annuity.

Both Fixed and Fixed-Indexed Annuities provide an alternative for retirees seeking income other than from traditional staples such as CDs, money market accounts, or bonds. For those seeking income and safety, annuities may be an asset class to consider, if appropriate for their situation.

Disclosure: Guarantees are based on the claims paying ability of the issuing insurance company. They may not be appropriate for all. Please contact your financial professional or insurance producer for complete details

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