Annuities

ANNUITIES

WHAT ARE ANNUITIES?

The term “annuity” gets thrown around quite a bit in the financial world, especially when discussing retirement income strategies. But there is confusion around the word because, well, annuities are complex. In simple terms, an annuity is an insurance hybrid with a type of guarantee in it. Annuities are typically used for retirement savings or generating income during retirement.

Still confused? Let’s break it down some more.

HOW DO I GET AN ANNUITY?

Annuities are sold by insurance companies, which allow you to set aside money in that annuity to let it grow over the course of a year without paying taxes on it. After a year of watching your annuity grow, you will then be able to make income on it by streaming payments for the future. These payments are taxed, just like your income from a job would be. However, unlike IRAs, there isn’t a limit as to how much money you can put in an annuity.

HOW MUCH MONEY CAN I MAKE WITH ANNUITIES?

Your annuity income can vary, but they can provide a great benefit, which is the large group of other annuity customers. Insurance companies use actuaries to determine how much to pay out from their annuities. Actuaries are statisticians that look at life expectancy numbers. The actuaries determine, on average, how long a group of people will live and then figure the amount of premium they need to collect to guarantee a lifetime income for their clients.

So, there is a good chance your annuity can make you money for quite a while. However, it is important to note that not every annuity offers the same guarantees.

CAN I GET ANY TAX BENEFITS THROUGH AN ANNUITY?

As stated above, when you first purchase an annuity, you can set it aside for a year and watch it grow without paying taxes on it. In addition, annuities can protect your money from being taxed or defer taxes on your returns. While this sounds great, IRAs or a 401(k) might be a better fit for your needs.

ARE THERE RISKS IN PURCHASING AN ANNUITY?

While fixed annuities can eliminate the general risk of investment in the market, there are other risks that cannot go unmentioned or unconsidered. One risk to keep in mind is inflation. There are cost-of-living adjustments included in Social Security benefit plans, but that is not the case for the majority of annuities, thus reducing the spending power of monthly payments throughout the annuity contract. Yes, there are annuities with cost-of-living adjustments available, but they are much more expensive.

Another risk that must be considered when purchasing an annuity is insurance company failure. There is always a chance that the insurance company you purchased an annuity from fails or shuts down. This would leave you hanging, because private annuity contracts are not covered or guaranteed by the FDIC or SIPC. You can avoid this by dividing annuity contracts among a few insurance companies to stagger risk and gain more protection. Learn more about our services and how we can assist you in stress-free retirement planning at Mercurio Wealth Advisors.