Annuities /
C.D.'s
Annuities
Life spans in the United
States have been increasing for over a hundred years. It is
now common for people who reach retirement age to live 20
years or more in retirement, most of those years in good
health. It’s good to live a long and full life, but you want
to be sure that your income lasts as long as you do, and its
purchasing power is as strong as you are. How can you manage
the risk of “outliving your
assets”?
Annuities are a unique financial product
that, along with Social Security, employer pensions, your
401(k) plan, IRA and other assets, can enhance your
retirement security. Discuss this option with one of our
insurance professional or financial planner's when mapping
out your retirement strategy.
What is an
annuity? In its most general sense, an annuity is an
agreement for one person or organization to pay another a
stream or series of payments. Usually the term “annuity”
relates to a contract between you and a life insurance
company, but a charity or a trust can take the place of the
insurance company.
There are many categories of
annuities. They can be classified by:
Nature of
the underlying investment – fixed or variable
Primary
purpose – accumulation or pay-out (deferred or
immediate)
Nature of pay-out commitment – fixed period,
fixed amount, or lifetime
Tax status – qualified or
nonqualified
Premium payment arrangement – single premium
or flexible premium
An annuity can be classified in
several of these categories at once. For example, you might
buy a nonqualified single premium deferred variable
annuity.
In general, annuities have the
following attractive features:
Tax deferral on
investment earnings
Many investments are taxed year by
year, but the investment earnings—capital gains and
investment income—in annuities aren’t taxable until you
withdraw money. This tax deferral is also true of 401(k)s
and IRAs; however, unlike these products, there are no
limits on the amount you can put into an annuity. Moreover,
the minimum withdrawal requirements for annuities are much
more liberal than they are for 401(k)s and IRAs.
Protection from creditors
If you own
an immediate annuity (that is, you are receiving money from
an insurance company), generally the most that creditors can
access is the payments as they’re made, since the money you
gave the insurance company now belongs to the company. Some
state statutes and court decisions also protect some or all
of the payments from those annuities. And your money in
tax-favored retirement plans, such as IRAs and 401(k)s, are
generally protected, whether invested in an annuity or
not.
An array of investment options, including
“floors”
Many annuity companies offer a variety of
investment options. You can invest in a fixed annuity which
would credit a specified interest rate, similar to a bank
Certificate of Deposit (CD). If you buy a variable annuity,
your money can be invested in stock or bond (or other)
mutual funds. In recent years, annuity companies have
created various types of “floors” that limit the extent of
investment decline from an increasing reference point. For
example, the annuity may offer a feature that guarantees
your investment will never fall below its value on its most
recent policy anniversary.
Tax-free transfers among investment options
In
contrast to mutual funds and other investments made with
“after-tax money,” with annuities there are no tax
consequences if you change how your funds are invested. This
can be particularly valuable if you are using a strategy
called “rebalancing,” which is recommended by many financial
advisors. Under rebalancing, you shift your investments
periodically to return them to the proportions that you
determine represent the risk/return combination most
appropriate for your situation.
Lifetime income
A lifetime immediate
annuity converts an investment into a stream of payments
that last as long as you do. In concept, the payments come
from three “pockets”: Your investment, investment earnings
and money from a pool of people in your group who do not
live as long as actuarial tables forecast. It’s the pooling
that’s unique to annuities, and it’s what enables annuity
companies to be able to guarantee you a lifetime income.
Benefits to your heirs
There is a
common misconception about annuities that goes like this: if
you start an immediate lifetime annuity and die soon after
that, the insurance company keeps all of your investment in
the annuity. That can happen, but it doesn’t have to. To
prevent it, buy a “guaranteed period” with the immediate
annuity. A guaranteed period commits the insurance company
to continue payments after you die to one or more
beneficiaries you designate; the payments continue to the
end of the stated guaranteed period—usually 10 or 20 years
(measured from when you started receiving the annuity
payments). Moreover, annuity benefits that pass to
beneficiaries don’t go through probate and aren’t governed
by your will.
Why should I consider
purchasing an annuity? Annuities can serve many useful
purposes.
If you are in a saving-money stage of life, a deferred
annuity can:
Help you meet your retirement income goals.
Employer-sponsored plans such as a 401(k), 403(b) or Keogh
are an important part of planning for retirement. However,
contributions to these plans and to IRAs are limited, and
they might not add up to enough for the retirement income
you need, especially if you started saving for retirement
late or had contributions interrupted—perhaps due to job
changes and/or family responsibilities. Moreover, your
social security and defined-benefit pension (if you have
one) may provide less than you need to retire. Remember that
the purchasing power of defined-benefit pension income is
eroded by inflation.
Help you diversify your investment portfolio. Investment
experts routinely advise that, to get the best return for a
given level of risk, you should diversify your investments
among a number of asset classes. Fixed annuities, in
particular, offer a unique asset class—an investment that is
guaranteed not to decrease and that will actually increase
at a specified interest rate (and, often, potentially more).
The guarantees are supported by the claims-paying ability of
the insurer.
Help you manage your investment portfolio. Our Investment
experts routinely advise that, whenever your investments in
various asset classes get too far from the percentage
allocations you prefer, you “rebalance” to the original
formulation, by shifting funds from the classes that have
grown faster to the ones that have grown more slowly. If you
do this with mutual funds, you pay capital gains taxes; if
you do it in a variable annuity, you don’t pay capital gains
taxes. When you eventually withdraw money from the annuity
(which could be many years after the rebalancing), you pay
tax then at the ordinary income rate.
If you are in a
need-income stage of life, an immediate annuity can:
Help
protect you against outliving your assets. Social security
pays retirement income for as long as you live, as do
defined-benefit pension plans. But the only other source of
income available that continues indefinitely is an immediate
annuity.
So to recap, if you do not want to be in an Aggressive
Investment and you are tired of losing money month after
month then an Annuity is a safe way to invest your money or
add to your
portfolio.
C.D.'s
One savings tool
is a certificate of deposit or a CD. A CD is a tool that
locks your money in at a set interest rate for a certain
period of time. The interest rate is usually higher than a
normal savings account or a money market account, since you
do not have access to the money for the length of the CD.
Generally a CD is a very conservative way to save your money
since the rate of return is so low on the account.
You may consider setting up a CD
if you know that you will be using the money in a specific
period of time and will not need to access it immediately.
However, this is generally for very short periods. If you
are looking at more than five years you should consider
Annuities or mutual funds. If you are considering a shorter
period you should also consider a money market account. A CD
rate will not go up if the interest rates begin to rise
whereas a money market account will. If the interest rates
are close it may be better to go with a money market
account, because the interest rates vary according the
current market.
One of the biggest risks
of a CD is that you will not earn interest at the rate of
inflation. Additionally if you do need to access
the money before the CD term is up you will pay penalties
and early withdrawal fees. If you are considering opening an
IRA that is a CD you would be better off going with an IRA
that is connected to mutual funds.
CDs have different options when it
comes to paying interest on the account. Many CDs will
deposit the interest into one of your accounts monthly or
quarterly. Other CDs will add the interest back into the CD
or pay the interest at the end of the CD term. Additionally
some CDs will automatically roll over into a new CD at the
current market rate. If this is the case, you need to mark
the date on your calendar so that you can withdraw it and
put it into a better investment option.
If you have
additional questions on Annuites/C.D.'s contact one of our
professional consultants for a no obligation
consultation.
United Financial
Group
(334) 472-0040 - Main
(904)
216-9750 - Fax
Customerservice@unitedfinancialgroup.info
