With all of the surprises and uncertainty in our world today, there aren’t many things in your financial life you can always count on. However, there is one that can—annuities.
Annuities date back thousands of years to the Roman Empire. In fact, the word annuity is derived from the Latin annua, meaning “annual payment,” and was used to describe the guaranteed money paid to soldiers for their years of service. In the U.S., annuities have been used for hundreds of years, to protect retirement for millions of Americans.
While the benefit of lifetime income remains one of the significant benefits of annuities, they have evolved dramatically in recent years to meet the increasingly complex and changing needs of investors preparing for or in retirement. Like most other financial products and investments, annuities can be complex, which is why you should always discuss retirement plans with your financial professional. At the most basic level, annuities now span three basic types—fixed, indexed and variable—and many can be customized to achieve your particular financial needs and objectives.
But the one universal aspect of all annuities is that they provide “protection” in retirement and a wide variety of powerful benefits.
Here is a quick look at some of the most popular.
Protected Lifetime Income. Since pensions have virtually disappeared, and Social Security typically provides only 40% of your pre-retirement income—the steady income that annuities provide is one of the most unique and important benefits sought by investors. Many use the income to pay for non-discretionary expenses such as a mortgage, utilities and groceries.
Annuities deliver cash flow that you can rely on for either a predetermined period of time or for the rest of your life. Deferred income annuities, for example, let you lock in a stream of protected income years before retirement, while reducing the effect of market volatility on your retirement income plan.
Protected Growth. The ability to limit the downside risk of an investment, while still providing upside benefits—also known as stop-loss strategies—has long been favored by investors active in the stock market. Some deferred annuities provide a similar benefit, allowing you to create a retirement plan that provides some protection from market declines while allowing you to capture gains from your investment.
Fixed indexed annuities, a type of deferred annuity, also offer the opportunity for growth based on a market index. It is typically capped at a certain level which may be less than the actual market gains achieved by the index, in exchange for protecting your principal investment.
Protected Initial Investment. As an optional benefit, many annuities offer the ability to protect your principal, where the initial money you’ve invested is not at risk due to market losses. This is a real benefit for those looking to improve their potential returns through the various types of investment options available within these annuities.
Tax-Deferred Earnings. A smart retirement portfolio weighs the potential impact of the many types of taxes that can affect your nest egg and income in retirement, including capital gains and ordinary income tax obligations.
All annuities offer tax-deferred growth, meaning taxes aren’t paid on the assets or investment gain in an annuity until they’re withdrawn. In this way, the annuities tax treatment is similar to other tax-advantaged accounts, like a 401(k), with one big difference: there is no cap on how much you can invest in a non-qualified annuity or income limitation to consider.
The benefit of tax deferral can be immense, allowing your investment to compound tax free from investment growth, dividends and interest for decades.
Protected Assets. A common estate objective is to shelter assets from prying eyes, as well as unnecessary tax obligations. Insurance companies can and will work with you to create custom contracts that specify payout and beneficiary options. Because annuities are insurance contracts, and therefore not subject to probate, they can protect your estate’s assets from public disclosure and taxation.
Protected Family Benefits. Another common estate objective is to leave financial assets to one’s loved ones or other beneficiaries. You can use an annuity, for example, to leave a legacy. Annuities can be customized to help pay for the living expenses of your child or your grandchild’s college education, while avoiding the burdens arising from probate.
The evolution of annuities—and the variety of benefits they now provide—explains why they are becoming a mainstay in the retirement portfolios for millions of Americans and play an important part in a truly diversified retirement portfolio.
To learn more about annuities and their potential benefits to you, visit protectedincome.org.