Annuity

Annuity Expert Advice — Finding the Right Guide to a Secure Retirement

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Annuities are a great solution for guaranteed lifetime income and other contractual guarantees, but you want the right one for your situation. How do you navigate an annuity market with thousands of annuity products – and sometimes inferior choices, at that?

It starts with finding the right annuity expert advice – or in other words, professional guidance for your situation to locate the best-fitting annuity just for you. In this article, we will go over different things to keep in mind as you search for expert annuity advice that is right for your circumstances.

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Understanding the Annuity Aggregation Rule

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Annuities provide tax-deferred growth and pay guaranteed income during retirement. If you own an annuity, then it’s good to know how to pay taxes on your withdrawals.

Of course, your annuity carrier will send you a statement at the end of the year showing how much you need to report as taxable income. Nevertheless, knowing what to expect can save you from an unpleasant surprise when you file your tax return. That is especially the case for non-qualified annuities, in which your funds aren’t subject to required minimum distributions. For that reason, tax hits on your non-qualified annuity withdrawals may be a little less familiar territory.

This article on annuities and taxes is a great starting point for understanding the fundamentals of how annuities are treated under different parts of tax law. In this article, we will focus on more on a breakdown of the tax rules for non-qualified annuity withdrawals.

There is one little-known rule that affects you if you own more than one non-qualified annuity, and that is called the “aggregation tax rule.” Let’s get more into that in a little bit.

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Individual Retirement Annuities – A Closer Look At What They Are

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An individual retirement annuity is a retirement savings vehicle issued by life insurance companies. The individual retirement annuity can come in fixed or variable flavors. Similar to traditional and Roth IRAs, it works much like any individual retirement account (IRA) and is subject to contribution limits.

The retirement annuity offers a steady income stream to its owners, and it can have higher fees than IRAs. You can check with your financial professional for more details on that. The retirement annuity, like an IRA, is available in both traditional and Roth versions.

Therefore, the annuity owner can take the upfront contribution deduction available to the traditional account. Or they can choose to receive tax-free income at retirement. With the private pension rapidly disappearing, creating your own pension-style payment stream may be a good idea for you.

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Bonus Annuity – How Does It Work?

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A bonus annuity is an annuity product that offers either an upfront bonus on premium or a first-year bonus on the interest rate. The premium bonuses are usually associated with fixed index annuities, while the interest rate bonus usually comes with a traditional fixed annuity. Bonuses are even attached to variable annuities on occasion.

Life insurance companies offer the bonus as an incentive to choose that annuity. One of the complexities of annuity bonuses is that, while they usually get credited on day 1, they actually vest over the contract’s life.

It’s good to know that generally speaking, the growth potential of a bonus annuity will be less than that of a non-bonus annuity. This is one trade-off for the annuity bonus.

Here’s a rundown of how bonus annuities work. This is a good starting point of what to look out for if you are considering a bonus annuity for your financial goals.

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What Are the Disadvantages of Annuities?

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Annuities are a major staple for retirement planning in the financial products marketplace today. Their guarantees of principal protection and lifetime income make them attractive to many people, especially in the aftermath of the pandemic.  

Nevertheless, some financial advisors and retirement savers just don’t like annuities, and there are a variety of reasons for why. Annuities have limits, just like any other financial product, and you should understand what you will get with an annuity before signing on the dotted line. Here’s a quick rundown of some drawbacks of annuities – and also other places in which they come out strong.

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Guaranteed Retirement Income Beyond Annuities: Financial Boom or Bust?

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The idea of dependable, ongoing lifetime payments in retirement is appealing to many people. For over two thousand years, annuities have been a time-tested source of guaranteed income across continents, cultures, and walks of life.

Even now, the need for guaranteed lifetime income is still strong in the face of ever-changing markets, meager interest rates, and other economic factors often beyond anyone’s control.

Of course, there are some ways to get guaranteed retirement income beyond annuities. You have a number of vehicles at your disposal:

  • Bond ladders,
  • CDs,
  • Treasury securities,
  • Defined-pension payouts,
  • Reverse mortgages, and
  • Other certain fixed-interest investments

The Guaranteed Income Question

The million-dollar question is whether these guaranteed instruments can offer you the same level of confidence as annuities can.

Yes, decisions on what to include inside your income strategy always depend on your personal situation. But annuities themselves can pay you a guaranteed income for life in ways that others can’t.

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How Mortality Credits Make Annuities Work

If you want to maximize your retirement income, then it’s good to know how mortality credits can affect how much lifetime income you receive from an annuity. Insurance companies use mortality credits in their calculations of income payments to their annuity contract holders.

Leveraging mortality credits could make a big deal in just how much income you receive throughout retirement. Moreover, this income stream can let you keep up your current lifestyle in retirement with a predictable, ongoing flow of money to spend each month.

Here’s a look at how mortality credits drive annuity payments – and how these can play to your advantage for a financially comfortable retirement.
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How Do Interest Rates Affect Annuities?

Interest rates affect annuities in sometimes strikingly different ways. The interest rate that most annuity companies follow is the 10-year Treasury rate. When it rises, most types of annuities are better off (but not all of them). When it falls, it often hurts many annuities.

Again, interest rates don’t affect all annuities the same way. So, let’s start by looking at annuity types and then how interest rates impact them. That will help you decide what annuity might be best for your needs.

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How Are Annuities Taxed?

Taxes are a top retirement concern, and as annuities are the only financial vehicle that can pay a guaranteed lifetime income, you might wonder about annuities and taxes. To understand how annuities are taxed, you should first understand the different types of annuities and how they can be used.

Basic Annuity Types

There are a few basic types of annuities in the market today. It’s good to note that all annuities are capable of paying a guaranteed lifetime income. But some annuity kinds are better equipped to pay you lifetime income while others are stronger for growth.

That being said, these basic types of annuities are:

Fixed Annuity­ – A fixed annuity typically provides a guaranteed rate of growth for a specified period. The longer the term is for your fixed annuity, the higher that interest rate tends to be. So, it’s vital to select the company from which you buy an annuity carefully.

Fixed Indexed Annuity – A fixed indexed annuity offers growth potential that is tied to an underlying financial benchmark index. The annuity allows the contract holder to have their money earn interest, based on what the index does, without downside exposure.  

Variable Annuity – A variable annuity allows someone to place money in various mutual fund-like accounts for investment purposes. Legally, it’s both an insurance policy and a security. However, a variable annuity does expose the annuity assets to the full risk of loss in the market.

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Annuity vs. Pension — Key Differences to Know

If you are one of the lucky few with a defined-benefit pension, then you might have wondered about what your options are with a pension versus an annuity. But while pensions were a common thing of the past, they aren’t around as much anymore.

In the days before smartphones and social media, many people had only one employer. Throughout their career, folks worked for one company and received a pension when they retired. From there, they would receive payments for the rest of their lives.

Today, unless you have a government job of some sort, pension benefits are rare. An annuity may be a good option for you if you don’t have a pension but like the idea of receiving income for the rest of your life.

As you consider the pros and cons of annuities vs. pensions for retirement, here are some key factors to consider.

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Next Steps to Consider

  • Start a Conversation About Your Retirement What-Ifs

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    Start a Conversation About Your Retirement What-Ifs

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    What Independent Guidance
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    See how the crucial differences between independent and captive financial professionals add up. Learn More

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