Understand the basics:

What Is An Annuity Investment?

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Annuities: Understand the Basics:
Let's cover the basics:

What Is An Annuity Investment?

What is an annuity investment?  Actually, an annuity is not an investment; Instead, it is a long-term policy contract between you and an insurer. A few annuities, however, have similar characteristics to investments.

Generally, annuities with investment characteristics are used for funding retirement. Having an annuity in retirement can be a great way to provide guaranteed lifetime income.

While accumulation annuities are not investments, they do share a similar purpose: helping you save for retirement in a tax-efficient way, with a range of options. Certain annuities such as fixed index annuities are linked to an external index such as the S&P 500 but do not directly invest in the stock market.

are annuities taxable
Safeguard Your money

What is an annuity investment FIA?

For example, a fixed index annuity, doesn’t fluctuate its value with the stock market. Instead, it is a contract with you and an insurance company. You contribute a set amount of money. Simultaneously, the insurance company agrees to pay you a specified amount. These payments occur on a regular schedule and after a predetermined term. The insurance company then sets aside a “reserve”, as required by law. This is one of the reasons that a fixed index annuity can guarantee* protection of your money.

Keeping it Simple

The Phases of an Annuity

Expenses are another critical aspect of planning for retirement. We work with our clients to discuss their expected expenses in retirement. You might be yourself asking, “Do I have enough for retirement?” To find out, be sure to create a budget. Lay out how much you intend to spend on the essentials such as housing and food. Next, be sure to include the “extras.” For example, a dining out budget item, or a line item for gift-giving. Finally, always have a “unknown” or “just in case” section of your budget. This will protect you in the event of unexpected costs. Additionally, it can give you a way of creating some earnings each month. A little breathing room goes a long way in helping you answer, “Yes” to the question, “Do I have enough for retirement?”

Accumulation Phase

To explain further, your annuity will begin to grow based on the type of annuity you have. These financial products will grow with the market, but will also have the risks associated with the market. Fixed index annuities will grow based on market rise, without the risk of market declines. In both cases, your money is in a waiting period. The idea is to let the money stay put. To determine which is best for you, you may want to consider the timeline of when you need access to your retirement funds.

Distribution Phase

Next comes the distribution phase. You take money out of your annuity in this phase. Your income payments can now come from your annuity. Indeed, this is a major reason for an annuity in the first place. You can create scheduled annual payments over a specific term. Importantly, you can even set a lifetime term. Additionally, you may decide to take income withdrawals monthly or quarterly. In this way, you take predictable income systematically instead of random annual payouts. Many annuity products offer you flexibility. You can choose from many different types of payout options, based on your needs. One of these options includes a guaranteed income for life. Another feature to consider is joint guaranteed income for life. Also, what may be important is annual increases in income for life, to offset the rising cost of living expenses over time. Lastly, a big concern is confinement costs like a nursing home or home care. One feature that may be beneficial is an income double feature that is available as long-term care feature. 

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Tax deferrment

Do Taxes Help Determine What is an Annuity Investment?

Your annuity earnings can grow in the accumulation phase, tax deferred. In other words, the money accumulated during that term is non-taxable. In fact, you only pay taxes when you pull the money out (the distribution phase). This can be very helpful for those who wish to reduce their current tax liability.

There are other possible benefits, too. To prove this point, let’s look at an example. Let’s say you are under 59 1/2 years of age. Suddenly, you’re offered an early retirement package. As part of this package, you may consider rolling over your lump sum  401(k) profit sharing plan into an IRA fixed index annuity. Typically you would have to pay a big tax bill if you just took a distribution. However, if you rolled it into an annuity and sheltered it with an IRA, you could avoid those taxes. Of course, we recommend that you consult with tax professonal if you have any questions about taxes.

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