Planning for the future.
Retirement & Annuities.
Have you ever looked at the alphabet soup of financial accounts and just tossed up your hands and thought it is too complicated to try and understand?
There are 2 main types of accounts, tax-deferred and tax-free accounts.
An annuity is not a different product or vehicle, it is simply an interest bearing account with an insurance company. How can it help me meet my retirement needs?
There are 3 basic types of annuities, variable, indexed, and fixed. You will hear a lot of information, some conflicting information, about annuities because people will lump these 3 very distinct types altogether. These annuities behave very differently, let’s take a look at how they behave.
If it stays the same, why do people roll their funds or retirement money into an annuity?
Let’s first briefly go over what are the characteristics of the 3 vehicles.
What is a Tax-Deferred Account?
Would you believe that for tax purposes, a 401(k), 403(b), TSP, or traditional IRA are all pretty much the same thing? It just depends on where you started your retirement account. A 403(b) is if you started at a school or hospital, a 401(k) is if you worked at a private company, TSP is if you were a government worker and if your job doesn’t offer a retirement plan, you can just go open an IRA (Individual Retirement Account). Eventually you will probably roll your old retirement plans into an IRA because you don’t necessarily want to have multiple orphan accounts just sitting with your old jobs
What is a Tax-Free Account?
A Roth 401(k) or Roth IRA are different because it allows you to grow the money and take it out tax-free. These are after tax dollars that go into a Roth and the money grows tax-free, not tax-deferred, and the money can also be withdrawn tax-free.
Variable
Variable annuities are very much like a 401(k) or mutual funds, they go up and down with the market. They can have extra features like a guaranteed death benefit or a guaranteed income.
Fixed
If you are familiar with a CD, a fixed annuity is very much like a CD. It is a fixed rate of return for 2 years or 5 years or a set period of time. There are no surprises with a fixed annuity, the rate will remain the same the entire length of time and you can withdraw it or re-roll it once it matures.
Indexed
Indexed annuities are like a hybrid. They follow market indexes and go up with the market, however, they have a contractual guarantee to never lose money. If the market goes down, then your account will remain the same. There can be a certain peace of mind knowing that your account will never lose money.
Common Annuity Myths Debunked.
When I die The Insurance Cmpany Keeps My Money.
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This may have been true at one point in history but it is very rare now. It was a process called annuitization. Saying annuities of the past act the same as annuities of the present is similar to comparing your cell phone today to a flip phone or even a landline phone. Yes, they both allow you to make phone calls but they definitely do not have the same tools.
They Have Low Returns.
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Going back to the cell phone example, years ago, annuities did predominately have low returns. But much has changed as your phone has gone from a flip phone to a mini supercomputer that fits in your hand. You can see participation rates that are equal to market returns and some even higher.
They Have High Fees.
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There are some annuities that have high fees, those are usually the variable annuities. There are numerous annuities that have no fees at all. And you can opt to pay some fees if you want to address specific concerns.
Reasons people will pay fees are to have an increased benefit if they go into a nursing home, or a more aggressive lifetime income schedule or more aggressive growth. Depending on what you are looking to accomplish it may make sense to pay those fees, but you can have an annuity with no fees at all.
My Money Is Locked Away.
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Annuities, like most retirement strategies are designed to be long term. Most annuities are designed to give you certain benefits and in exchange for these benefits, there are some limitations. Most annuities will allow you to access 10% penalty free every year. In essence when you reallocate funds into an annuity you are letting the insurance company know most of that money can stay there most of the time. Some people will argue and make a big fuss over only having access to 10% every year, but when was the last time you took out half of your assets for any reason, emergency or otherwise?