Fixed Annuities are a conservative approach for saving for retirement. We will not be discussing variable annuities as they are subject to market risk and high fees that we feel are not in the best interest of most of our clients.
Annuities are purchased from Life Insurance companies and payment options can be a single lump sum or a series of payments over a defined period. Most annuities have surrender charges when taking withdrawals prior to agreeing upon distribution schedule. These are normally long-term contracts that allow penalty free distribution up to 10% of the accumulated value to be withdrawn annually. Typical annuity contracts are set up for 5,7 10- and 12-year periods.
Annuities provide many options for choice as retirement vehicles. They can provide lifetime income, growth potential (a hedge against inflation) and eliminate downside market risk giving annuities a winning combination for use as a retirement vehicle. While much uncertainty exists in the markets, annuities provide something money markets and CD’s accounts cannot; growth potential without downside risk and opportunities to convert account values into income streams to meet individual objectives. In addition, annuitant’s may change how their investment portfolios (sub accounts) are to credit their interest earned a minimum of once a year.
There are two phases of annuities with many options within each phase. The Accumulation Phase or growth phase allows the investment to grow while deferring withdrawals until a time for exercising income riders, or annuitization, or just individual partial withdrawal of some or all your account value. Annuities have a death benefit provision that when the owner designates a beneficiary, they are guaranteed a minimum value of the contract or the non-distributed payment schedule to be paid out to the beneficiary. Many annuities allow for the annuitant to customize the terms of how the beneficiary will receive the payout.
The Annuitization Phase begins with a contractual agreement to disburse payments (income) over a set period to the annuitant (owner). This payout phase varies in size of installments and length of time depending on the type of annuity and the amount and value being annuitized.
Each of these phases has guarantees built inside the policy to protect the principal and outlines terms upon distribution, annuitization or the exercising of an income rider.
Factors Used in Consideration for Income Payments
Your insurance company has multiple factors to account for when it comes time to begin issuing your income payments. This is when you enter the distribution phase. Once entered, your insurer’s actuaries determine your amounts according to mathematical formulas.
The actuaries take these into account:
- How much money you have accumulated and the amount you wish to convert to an income stream.
- Your current age – the older you are the more income to expect compared to a younger person with a higher probable life expectancy.
- Current and anticipated interest rates
- Length or number of years for distribution
- If married with a joint payout – policy will issue payments until the last person passes.
What Are the Types?
You have freedom with your annuity contracts and choices based on your payment disbursement preferences and risk tolerance. Great consideration should be given to what your current and future anticipated living expenses are and how much you will be receiving in Social Security income and pensions before selecting terms of your income payments. All of this will need to be weighed against life expectancy and your current health.
Income Annuity in the purest form provides a transfer of a sum of cash for a guaranteed fixed income payment for life.
Fixed Period Annuity – installments guaranteed and distributed over set periods of time. Not determined by mortality table, age, or gender of the annuitant.
Single Lifetime Annuity distributes level income to the annuitant for their lifetime. Once an annuitant passes, payments end and the contract is fulfilled. Amount paid overtime is determined by mortality calculator, gender, and age of annuitant at inception along with interest rate the company believes it can support over time. Customizing a lifetime annuity with a minimum fixed period of payments is normal with these contracts.
Joint Lifetime Annuity parallels the Single Lifetime Annuity, but payments are figured on 2 lives instead of one and when this occurs more options are available to customize payouts.
Fixed Immediate Annuities begin payouts within one year of contract and release the same amount of money each month for an expected number of years. You won’t have to worry about a failing market impacting your payments, but at the same time, you don’t benefit from a thriving market, either. Also true, when price of goods and services go up (inflation) this will leave you with less buying power from your income stream
Deferred Indexed Annuities allows your investment to be allocated to different choices of indices, stocks, bonds, S&P 500, Barclay’s indexes, small cap companies, international indices etc. The safety and preservation of your investment allows annuity owners to participate in the upside growth of the market while eliminating the downside risk. This interest crediting strategy gives you a hedge against inflation with potential solid returns while not devastating your account value during a market correction or free fall.
Variable Annuities have the highest risk, but also have the potential for some outstanding gains. Here, your monthly payments are invested in subaccounts with no floor, so you assume full risk of market fluctuations. In addition, high fees associated with the management of those subaccounts keeps me from recommending variable annuities to my clients.
Secure a Monthly Income for Life or Find Growth Without Downside Market Risk
Iowa Medicare Group is devoted to your financial needs and comfort because we operate under the principles of honesty, integrity and dedication. You have worked hard to build your retirement nest egg. Now it’s time to let your money grow and work for you safely.