Are you looking for a safe place to put your retirement savings that gains when the market goes up, but doesn’t lose when the market goes down?
When I first heard of annuities, I didn’t believe it either, but that is exactly how our annuities work. How you ask? Well let’s talk more about just what is an annuity, and how it works. I am going to keep this article simple and basic, and then I will do another one expanding on what we cover here.
Want to learn more if an annuity is right for you? Schedule a time to meet with Mark to discuss your options.
What is an Annuity?
In the most simple terms, an annuity is a retirement savings account with an insurance company.
The main reason to grow your retirement in an annuity is because of the safety it provides. Now, if you want to get a good interest rate and have no risk of losing the money in your account, an annuity is the option to choose. This is why people who are approaching retirement will take their money out of stocks and mutual funds, and move it to an annuity. They want to get rid of the risk those other types of accounts have. No one wants to be saving for 30 years, and then 2 years before retirement the stock market crashes and you lose a chunk of what you had saved. You could end up having to delay your retirement until the market comes back.
The are 2 phases of an annuity. The accumulation phase and the annuitization phase.
1. Accumulation
In this phase you are saving and growing your retirement account. How?
- By making monthly contributions
- Gaining interest on the money in your account
2. Annuitization
This is the phase where you give the insurance company your money, or some of it, to keep. In return, they write you a check every month for the rest of your life. This is called annuitizing your money, and means you will never outlive it. Hypothetically, let’s say you give an insurance company a $100,000, and you tell them you want to annuitize the money. The insurance company then says, we will give you a $1,000 per month until you die. In 20 years, if your still alive, the total the insurance company would have paid you is $240,000. Remember too, the $1,000 per month keeps coming in as long as you are alive. So over time, you have been paid more than what you initially gave the insurance company to keep.
Now a very important thing to understand is you don’t have to do both, accumulation and annuitization. You can simply have your money making interest with the safety of an annuity, and then you can take the money out and do what you want with it. On the other hand, you may want to take your retirement from a 401K, IRA, etc., roll it to an annuity and go straight to the annuitization phase and start receiving monthly checks.
I remember the first annuity I ever set up, was for a woman who had me out to help her with mortgage protection insurance to cover the loan she took out to buy her home. While I was there she complained that her IRA was losing money, and the salesman was not returning her call. I asked her if she would like to look at some options that had guaranteed interest for her money, and she said “Heck yea!” I went back the next day, and we rolled over that IRA into an annuity, and I told her I promise to return her calls.
Are annuities beneficial for everyone?
You may be wondering if annuities are the best option for everyone. Let’s talk a little more about other benefits and features of an annuity to help you determine if one is right for you?
1. Start as early as age 18
Another benefit to annuities is you can start saving and protecting your retirement as early as age 18. If you don’t like risky investments, you could chose to put monthly contributions into your annuity account to build your savings.
2. Accessing Money in Your Annuity
An annuity is considered a retirement vehicle, therefore the money in the account can not be cashed out until age 59 1/2. You can, however, move the money between difference types of retirement vehicles, but if you cash it out before 59 1/2, the IRS will charge a penalty of 10%, just like a 401k, IRA, etc.
2. Taxes
All annuities accumulate tax deferred, so no taxes are paid as the interest is compounding year after year. Now, depending on if your money was a rollover from another retirement vehicle, will dictate how taxes are paid. For example, if your roll over funds from a Roth IRA it will be tax free when you take the money out. On the other hand, a 401k or traditional IRA are taxed at 100% when you take the money out. Finally, if you choose to start an annuity without rolling over funds from another retirement vehicle, say from your savings for example, it will be taxed on the gains or interest made when you take the money out.
3. Judgement Proof
In addition to providing safety from drops in the market, annuities bring protection for any judgements or liens against you. Of course, this varies by state, and I am not an attorney.
4. Length of Accumulation Phase
The accumulation phase works similar to a term life insurance policy when it comes to the length of time you have to keep your money in the annuity. There are various numbers of years to chose to have the insurance company hold your money as it pays you interest. I have seen some as low as 3 years, to up to 20 years. It’s definitely something you need to know when deciding on which annuity is best for your needs, because if you take the money out before the time is up you will be charged penalty.
Want to learn more about annuities and if this may be a vehicle that works for your retirement savings? Schedule an appointment to find out what options are best for you.
At this point, I hope you have gained a basic understanding of what an annuity is, and who or when they are an appropriate choice for your retirement needs.
Mark Womack
Eagle Vision Financial
mark@eaglevisionfinancial.com