Before you add an annuity to your income strategy, it’s prudent to understand what an annuity does and what it doesn’t do.

Essentially, annuities are insurance contracts. They are built to pay lifelong streams of fixed income, protect money from market losses, or offer tax-deferred money growth.

Indeed, billions of dollars sit in these contracts. A large part of that is due to their popularity for lifetime income, or for higher growth potential than with other low-risk interest-earning vehicles.

Nonetheless, there are still a number of myths and misconceptions about annuities. That might be attributable to a few factors, from annuities being fairly complex to misleading annuity marketing and sales tactics being touted.

This isn’t to say that annuities don’t have a place in a retirement portfolio.

Just like with any other financial vehicle, though, they must have a specified role. That can include solving for particular retirement risks, working in tandem with other parts of a portfolio to reach certain goals, or even simply providing peace of mind with predictable retirement income streams.

Let’s break down some annuity myths and misunderstandings, one-by-one, and learn more about them.

As an annuity owner, you take comfort in knowing that you have planned for an uninterrupted lifelong retirement income stream. Working alongside other income sources from your nest egg, it will pay out, like clockwork, to fund the retirement you have always imagined.

But have you considered whether your income streams are as "efficient" as possible? Whatever retirement strategy you choose — income and all — needs to be "tax-efficient" to ensure you get the most mileage out of your money.

This is just one more piece in the retirement planning puzzle that each of us must solve. When we don't plan for retirement, we run the risk of underspending or overspending our retirement dollars.

What if underspending doesn’t seem like a problem, but rather like an advantage? Consider what events and opportunities to which you may say “no.” And simply because underspending pressures you to have a scarcity mentality, or when you don’t really know if you can afford them.

Perhaps you might pass on an important family event or skip that overseas vacation you always expected to be a highlight of your retirement years. All because you didn’t have a true picture of your anticipated income compared to your expenses.

If you are approaching retirement, chances are you have been started exploring how you might enjoy a financially confident retired lifestyle.

This includes maximizing the value of your retirement portfolio – and creating dependable income streams that last as long as you need them to.

For retirement investors, one way to solve for this concern is drawing on a lifetime income stream from an annuity. But how appealing are annuities in the face of historically low interest rates? Especially ones such as those we have experienced for the last several years?

Since 2009, in the aftermath of the Great Recession, most developed countries have experienced a low-interest rate environment. Monetary authorities have sought to use low-interest rate schemas in order to spur economic growth and prevent deflation.

The U.S. saw rates cut to effectively 0% until 2016, when they began to inch higher. Still, today, the federal funds rate is only 2.5%, up just half-a-point from this time last year when it measured 2%.

“Inflation is as violent as a mugger, as frightening as an armed robber, and as deadly as a hit man,” Ronald Reagan once famously said.

And the worst time to try to fight this formidable foe is when you are in retirement, living on a fixed income. Many people have some employment, or some involvement with entrepreneurship, for a stream of retirement income.

But chances are they don't offer wage increases, or other inflation-countering benefits that you might have had in your working years, to help you keep pace.

Annuities are one of the few ways to obtain retirement income that is paid out as long as you live, making them a popular component of many retirement plans.

Investors have been using fixed annuities and fixed index annuities to provide lifetime income. These guaranteed income streams cover monthly costs and help people maintain their standard of living.

But if the annuity payout is fixed at the outset of the contract, by design it can’t be increased to keep pace with inflation. Should inflation rise 10% over time, for example, the buying power of a $3,300 monthly annuity payout erodes to $2,970.

This threat has the potential to affect a retiree’s lifestyle and could even require making unwelcome cuts in spending.

So how can investors seeking the benefits of annuities manage this inherent “inflation risk” and offset its impact? These are just a few of the ways.

Have annuities ever popped up on your retirement-planning radar? You might have come across some annuity contracts with a Market Value Adjustment feature. Several fixed index annuities and multi-year guarantee annuities (MYGAs) include this factor in their contracts.

A market value adjustment (MVA) simply refers to the ability of an insurance carrier to offer you higher rates by protecting itself against bond market declines. When an annuity has a market value adjustment in its contract, it’s called a market value adjusted annuity (or MVA annuity for short).

Normally the insurance company holds the interest-rate risk when you buy a fixed annuity. But an MVA annuity gives you the chance to earn a higher rate in exchange for sharing in some of that risk with your insurer.

After all, bond values are sensitive to interest rate movements. So one way to think of this is as a “safeguard” for the insurance carrier against bond market losses.  

If an MVA annuity happens to fall into your retirement purview, here’s a helpful look at what it might involve.

Annuities come in all shapes and sizes. And when you are considering one as part of your retirement strategy, sure, it’s important to determine whether an annuity is right for your financial situation.

But there are more annuities than hedge funds in today’s financial marketplace. That is a staggering number of options. If, relative to other solutions, an annuity does help you achieve your retirement goals, then choosing the right one is just as important as its role in your portfolio.

When people plan for their retirement, they usually have one chance to get it right. Your choices will determine whether you live well in later years – or will fall short and will have to deal with the results. This applies just as much to annuity purchase decisions as well as other financial choices for your future.

If you happen to be considering a fixed index annuity for your retirement, understanding how the annuity indexing works is a crucial component.

Your index annuity has many ways of being credited interest. And you might also have a wide menu of index options, from the plain-vanilla S&P 500 price index to newly-minted “volatility controlled” indices.  

First, let’s explore how annuity indexing works. This will cover only annuities of the fixed variety.

Then we will address the new wave of indexing options that include volatility controls, which are a debated topic in the industry.

Whether you are considering purchasing an annuity or you already have one, there are some key mistakes to avoid in order to benefit from annuity ownership.

The pitfalls below have tripped up many annuity buyers. Our insider tips on knowing what to look out for can prevent you from experiencing the same fate. Use these tips to help you in simplifying your annuity buying decisions or in optimizing your annuity contract as part of your retirement strategy.

Mistake #1: Thinking you can get out of an annuity at any time.

Insurance companies stipulate “surrender” periods in an annuity contract for a reason. They want you to hold the contract for at least that length of time.

These surrender periods are part of annuity contracts for many reasons. One of the most important is it helps the insurance company maintain the guarantees it’s promised to you as a policyholder.

Rising interest rates and an easing regulatory environment are contributing to near-record levels of fixed annuity sales. It’s good news for people who might rely on these fixed contracts for guaranteed income or protection. A strong marketplace can lend to new innovations, contract benefits, and contract features.

In the second quarter of 2018, total fixed annuity sales reached $33.7 billion, an 18% increase over second quarter 2017 sales. That figure shattered the quarterly benchmark, according to the LIMRA Secure Retirement Institute (LIMRA), a financial industry research firm.

Year-to-date, total fixed annuity sales were $60.9 billion, 9% higher than the first half of 2017, LIMRA reported.

Why all the excitement and elevated interest in fixed annuities? Two possible reasons - rising interest rates and relaxing regulatory pressures on financial markets.

"These products offer a unique value for retirees and pre-retirees seeking protected accumulation and guaranteed lifetime income features," says Todd Giesing, LIMRA’s annuity research director, in an interview with InvestmentNews. "Clearly, with the Department of Labor’s (DOL) fiduciary rule vacated and the prospect of continued rising interest rates, demand for this product is high."

Photo Credit: Fisher Investments, Featured in USA Today Special, Source Link. Photo is strictly intellectual property of its owner. All Rights Reserved. 

Long-time money manager Ken Fisher says he hates annuities. And he isn’t exactly shy about it. Since 2013, the head of Fisher Investments has run many blistering anti-annuity promotions – from critical columns and print ads to aggressive TV spots and online display advertising.

Over time, those promotional spots have driven market awareness, boosting Fisher's profile as a well-recognized annuity critic. Many campaigns still run today, with the ads building on the Fisher celebrity, retirement tips, annuity leg sweeps, or other stickler points.

But while the annuity marketing blitz has been a success, a recent article raises questions about Fisher’s strong public stand against annuities.

It may point to what some call a contradiction between the “I hate annuities” mantra of Fisher advertising campaigns and the investment holdings of Fisher’s firm.

At InvestmentNews, reporter Greg Iacurci writes that while the infamous anti-annuity ads were running, Fisher Investments itself was invested in companies with large annuity business.

Before you commit to an annuity as part of your retirement plan, it’s good to know the basics of this retirement tool. Every year, Americans put hundreds of millions of dollars into new annuity policies. Yet there still seems to be a measure of annuity misconceptions and confusion among consumers.  

You may have seen that a quick internet search of the word "annuity" delivers a wildly diverse set of opinions! And every financial pundit has their own take on annuities. Some of the loudest voices on the internet even claim to be against them, all the while offering annuity or annuity-like solutions to their following.

To help you sort through the noise, we break down common annuity myths and supplement the conversation with some facts.

Once a retirement staple, pensions have been gradually disappearing. Now we hold more responsibility for retirement than ever. That has its own challenges, including how to overcome longevity risk. You have to figure out how to pay for potentially decades of retired living.

Arguably one of the best ways to combat longevity risk is with annuities. However, as you come into the home-stretch and explore your income options, it’s natural to ask, “How safe are annuities for my retirement?”

The good news is they can be quite safe. But there will be some legwork involved to make any annuity-buying decisions that are right for you. Here are some pointers to follow as you consider an annuity for your retirement portfolio.

The American workplace has seen remarkable advancements over the past 20 years. From technology that has revolutionized the way we work, to the physical environments we work in, to the changing workplace conditions, almost every facet of the American workplace has been modernized. Every facet, it turns out, except, perhaps, the workplace retirement plan.

But American workers may soon benefit from new options within their retirement plans, thanks to several bipartisan bills. The pieces of legislation are currently under review by a congressional subcommittee, and they are designed to update the Employee Retirement Income Security Act (ERISA).

"Many ERISA provisions related to retirement plan administration are in desperate need of updating, with some having last been revised over two decades ago," according to Rep. Tim Walberg, chairman of the Subcommittee on Health, Employment, Labor and Pensions.

Walberg voiced this opinion during a recent hearing on "Enhancing Retirement Security: Examining Proposals to Simplify and Modernize Retirement Plan Administration."

Are annuities taxable? It's an important question if you are shopping for annuities with the goal of guaranteed income. An annuity can help us sleep better at night, knowing how much income the contract will provide each month and that it can last as long as we do.

But while guaranteed income may sound good, there is also the flip-side to consider. You may wonder about whether annuity contracts might pose a potential tax trap.

It's smart to consider the topic. And why? Because taxes are a primary concern for people in retirement. While released in 2010, a survey by Lincoln Financial Group still has relevance today. 

The study of affluent retirees found that federal income taxes were their largest expense. Among the respondents—age 62 through 75 with annual household incomes greater than $100,000—taxes were their largest expense. The survey results show that nearly 1 of every 3 dollars a retiree spent went to taxes.

Good news, though. A 2016 article by the Center for Retirement Research suggests that a "tax time bomb" may not be inevitable for many retirees. However, that premise is based upon 2007 U.S. household taxpayer numbers crunched by the Hamilton Project.

And other research, like a 2014 study on middle-income household awareness of retirement tax issues by Bankers Life, shows that taxes could well be a considerable chunk of future retiree spending. 

All of which leads back to that question: How could throwing annuities into the mix affect a tax bill?

Have you heard of a “market value adjustment” when researching annuities? A market value adjustment is a contract feature that comes with annuities of the fixed variety. Generally you will find it attached to traditional fixed annuities and indexed annuities.

A contract with this feature is called a “market value adjusted annuity,” or an MVA annuity for short. MVA annuities tend to offer higher interest rates than regular fixed annuities do.

With a market value adjustment feature in the contract, the insurance company shares some of its investment risk with an annuity policyholder. In exchange, the policyholder may enjoy more chances for growth potential than a regular fixed contract may provide. That being said, the market value adjustment factor applies typically to excess contract withdrawals and surrender charges. And depending on the interest rate environment, an MVA may be positive or negative, which can increase or decrease a surrender charge amount. 

The insurance company uses the market value adjustment factor as a safeguard against annuity contract surrenders and, in turn, to maintain its financial strength. That way it can maintain its contractual guarantees and promises made to its annuity policyholders.

Let's look more at what a market value adjustment involves -- and how it may be beneficial or negative.

You may have invested a fair amount of time crafting your retirement plan. Your financial plan might include an annuity that could both maximize your lifetime income and maximize the potential payout to your chosen beneficiaries. But you may not have focused on the options that your beneficiaries have when choosing how to take their payout.

So, what are the annuity beneficiary payout options and how do they work? Let’s find out.

Some index-based financial products have a "floor," or the maximum value you would lose if the index went down. In a fixed indexed annuity, the floor is expressed as a guaranteed minimum interest rate. This floor is usually set at at an annual rate of 0%, meaning that even if the index decreases in value, the interest to be credited won't be negative.

Essentially, the annuity floor will consist of your annuity's accumulation value plus the guaranteed minimum rate. You can never lose money due to any index declines. But your money may lose value in the times of index losses, if the indexed annuity contract has optional rider fees or you pay a surrender charge for early withdrawals.

If you are researching fixed index annuities to see if annuities may be for you, it's helpful to have a good knowledge of the essentials. Let's get started with a more in-depth discussion of a fixed indexed annuity, some of its common features, and how the floor guarantee may work.

Fixed and variable annuities may be appealing for a number of reasons - especially guaranteed income. Yet many people find it hard to discern what may be good annuity options for them. And that's as their fear of running out of retirement money remains strong.

Americans are more afraid of running out of money in retirement than they are of dying, according to a well-quoted statistic from Allianz Life. Of 3,000 people surveyed, 63% said they feared not having enough retirement money for life over leaving this Earth. That was the highest percentage of those who mentioned their financial concerns in the survey. 

Fears like this are what drive Americans to look for dependable income-paying vehicles. When shopping around for income solutions, many investors find annuities to be of interest.

If you are considering an annuity for your portfolio, it's important to understand everything before you make a decision. Knowing what a fixed versus variable annuity is, will be a good starting point.

Let's look at some of those distinctions now.

U.S. equity markets have taken investors on a wild roller-coaster ride over the last several days. Equities started free-falling after U.S. wage data released on Friday, Feb. 2, showed positive results. While economic news continues to be good, it raises the specter that the Fed will raise interest rates to ward off inflation. 

Higher interest rates would result in higher borrowing costs for companies and businesses. Not only that, it would become more expensive for consumers to buy cars and homes. 

It turned out that Friday’s drop was just the tipping point. The stock market went on a wild ride again on Monday, with the Dow Jones Industrial Average closing down 1,175 points. This represented the worst point drop in history. And at one point Monday afternoon, the Dow was down 1,579 points, which was the largest intraday point drop in the history of the index.

If all this market anxiety had you reaching for the Dramamine, you aren't alone. Most people are invested in the market in one way or another. So, many households felt the sting, and it has only slightly abated as the market has begun to recover some of its losses.

Many retirement investors use annuities for guaranteed income. But some find their annuity payout options to be confusing. There are a variety of methods to receive annuity income payments. With so many choices, it can be hard to decide what’s right for you.

People tend to feel more confident in their decisions when they are well-informed. So, this article will take a look at some common annuity payout options and how they are defined.

Before going into basic details, it’s important to recognize that your payout choices will differ among insurance companies. Some carriers may not provide the same annuity payout options you have with another carrier. Or the specific conditions and details of the payout options might vary. Keep this in mind as you choose how you want your future income payments to be calculated.

Considering its interest rate potential, a multi-year guarantee annuity, or MYGA annuity, may seem pretty "boring." This can happen especially when you compare it to a fixed index annuity and its growth potential.

But while many people see indexed annuities as appealing, not everyone does. Some retirement investors just want an unchanging, fixed growth rate for their money. The prospect of changing interest rates, from time to time, doesn’t appeal to them.

If you desire straightforward choices like this, a MYGA annuity might be of interest. Unlike with a fixed index annuity, a MYGA annuity gives you a fixed interest rate over time. In many cases, this interest rate doesn’t change in later contract years, like you often get in a traditional fixed annuity.

As you think over different types of annuities, it’s important to understand your options. Here’s a quick guide to understanding MYGA annuities, their benefits, and potential drawbacks in retirement planning.

The interest rates that an annuity earns largely hinge on two things: the type of annuity you have, and how the annuity is credited interest. Some annuities declare the interest rate ahead of time.

Other annuities earn interest based on ups or downs in an index, like the S&P 500 price index. Most annuities come with compounding interest. However, you may come across some contracts that offer simple interest growth.

If you are researching the potential for typical annuity interest rates, it’s important to know how annuities can differ by growth potential. Here's some crucial information to consider as you think through your potential options.

When it comes to annuities, people can have many questions. "What is the annuity exclusion ratio?" is a common one, especially for those considering immediate annuities. Many investors also ask about how the exclusion ratio may affect their tax burden in their retirement. 

The exclusion ratio is an important number. It helps calculate the amount in each of your income benefit payments that won’t be taxable. Several investors like to know its basic ins-and-outs so they can get an idea of what their taxes will be.  

What many people don’t know is that the annuity exclusion ratio may, in fact, reduce their overall tax liability. Since taxes can take a big bite out of retirement income, it certainly can pay off to understand this number and how it might impact you.

For people in their fifties, it’s never too early to think about a retirement financial plan. Even if you are starting a bit late in the game, now is an excellent time to catch up on planning.

However, so many investment, fixed-income, and insurance products are on the market. Like other investors, you may find it challenging to create strategies that meet your needs for safety and income.

Of the many options, annuities may be on your radar, but you may have heard bad things about them too. How can you judge if they are right for your financial situation?

To get started, learn about some scenarios where annuities can help people achieve their retirement money goals. Here are some things to consider when you are thinking of buying an annuity.

Retirement planning is an essential step in financial life. Part of the transition is to ensure that your money is safe and you have income available for the rest of your life. For risk-conscious and lifestyle-minded investors, one instrument to consider for a retirement portfolio is an annuity.

Apart from principal protection, low risk, and tax-deferred growth, annuities can generate a guaranteed lifetime income. This income benefit can help ensure that the contract owner has a constant, dependable cash-flow throughout retirement.

However, there are many aspects of an annuity that people should understand before making a purchase, such as fees and conditions. One of the important conditions set out by annuities are surrender charges.

Let’s take a closer look at what a surrender charge involves.

Year after year, many Americans are finding it harder to provide for their spouses during retirement. Guaranteed pension payments have been disappearing as more companies move toward 401(k)s and other savings plans. And with the end of file-and-suspend in Social Security, numerous couples now can’t use the higher earner’s wage record for greater benefit payouts.

This brings up the question of survivorship: How can retirees ensure their spouses receive sufficient income for current and future needs? Many couples have turned to joint life annuities as a long-term solution.

However, that doesn’t mean that a joint life annuity is right for everyone. In some cases, having separate annuities can be more prudent. Or it may be appropriate to seek retirement income strategies with other means. But no matter what, whether someone should choose a joint life annuity or a few single life annuities will vary on an individual basis. It depends on the potential buyer’s needs, goals, and situation, among other factors.

If you are considering a joint or single annuity, here are some pointers to help you think about your options.