Annuity

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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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. Read More

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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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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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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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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A non-qualified annuity is a contract designed to provide you with a steady, guaranteed income throughout your retirement. Funded with money you’ve already paid taxes on, these annuities can be a valuable addition to a diversified investment portfolio.

Not only can they supplement your Social Security benefits and provide a reliable income stream, but they also offer tax-deferred growth. In some cases, they may even lower your taxable income in retirement, potentially reducing taxes on your Social Security.

For those considering early retirement, non-qualified annuities can bridge the gap between your expenses and income from other assets, ensuring a smooth transition into your retirement years.

So, what is a non-qualified annuity? Is it suitable for you? Read on to find out.

How Do Non-Qualified Annuities Work?

Purchasing a non-qualified annuity establishes a contractual agreement with an insurance provider.  In exchange for after-tax premium payments, the insurer guarantees specific benefits as outlined in the contract terms.

One of the major perks of annuities is the potential for a guaranteed lifetime income – a rarity in the financial world. However, there’s a wide variety of annuity types available, so it’s crucial to do your homework and consult a financial professional before making a decision.

The Core Differences Between Qualified and Non-Qualified Annuities

The most notable distinction between qualified and non-qualified annuities lies in the tax status of the money used to purchase these annuity contracts. While non-qualified annuities are funded with after-tax dollars, qualified annuities utilize pre-tax money, often derived from employer plans like 401(k)s or traditional IRAs. This difference in funding source significantly influences how these annuities are treated tax-wise upon benefits distribution. Notably, the premiums paid towards non-qualified annuities are not tax-deductible, differentiating them further from their qualified counterparts. Given this tax differentiation, it becomes imperative to understand the implications of each type on your retirement strategy, particularly focusing on withdrawal tax treatments.

Key Features and Benefits of a Non-Qualified Annuity

Non-qualified annuities tout a range of features and benefits that appeal to many looking toward retirement. One primary advantage is the flexibility in choosing payout durations, whether you prefer regular payments over a set period or guaranteed income for life. This adaptability ensures that you can design a withdrawal strategy that meets your specific financial needs, even in scenarios where you might “outlive” your plan. Besides, these annuities are lenient on withdrawal terms and only tax your earnings upon withdrawal, providing a tax-efficient income stream.

Another standout feature is the absence of yearly contribution limits, allowing you to invest as much as you wish or even own multiple annuities to create a strong income ladder upon retirement. Their tax-deferred growth potential and flexible withdrawal options highlight non-qualified annuities as a strategic choice for those aiming to optimize their retirement income plans, offering a blend of reliability and fiscal efficiency.

Adaptability of Non-Qualified Annuities in Retirement Planning

Non-qualified annuities serve as a robust tool in retirement planning, offering a unique blend of adaptability and security. For individuals contemplating early retirement, these annuities fill the income gaps before other retirement funds become available, ensuring a steady cash flow to meet monthly expenses.

Additionally, non-qualified annuities complement Social Security benefits, providing a predictable income stream that enhances financial stability in one’s golden years. Given their funding with after-tax dollars, they afford retirees more control over their financial planning, allowing for a more tailored approach to managing retirement income in concert with other assets and benefits.

Non-Qualified Annuities and Required Minimum Distributions

A notable advantage of non-qualified annuities is their flexibility regarding income withdrawals. Unlike qualified annuities or traditional IRAs, which mandate withdrawals at a certain age (known as required minimum distributions or RMDs), non-qualified annuities offer more freedom.

You can choose when to start receiving income from your non-qualified annuity, providing valuable flexibility in case of unexpected financial needs. However, remember that withdrawing before age 59.5 may incur a 10% IRS penalty, along with regular income taxes.

While some insurers may have specific conditions or age limits for withdrawals, many non-qualified annuities don’t. Consult your financial advisor to understand any potential restrictions on your chosen annuity product.

This flexibility means you can leave your funds untouched until needed, which can be a lifesaver in emergencies. For instance, you could delay annuity income until a major health event necessitates long-term care. Certain annuity contracts even offer increased payouts to cover specific long-term care expenses.

If unused, the funds within your annuity can be passed on to your beneficiaries, adding another layer of financial security for your loved ones.

The Tax Implications of Non-Qualified Annuities

Non-qualified annuities offer the advantage of tax-deferred growth, allowing investments to grow without immediate tax liabilities until withdrawals are made. This deferment can substantially enhance the potential for compound growth over the lifespan of the investment. When withdrawals occur, only the earnings are subject to income taxes, while the principal—already taxed prior to investment—is not. For retirees, this may result in a lower overall tax obligation, especially if they find themselves in a lower tax bracket post-retirement compared to their working years.

Furthermore, since part of the withdrawal (the principal) isn’t taxed again, non-qualified annuities can effectively reduce the taxable income during retirement years, maximizing disposable income. This strategic financial planning tool ensures a more optimized and tax-efficient income stream in retirement, potentially reducing the tax burden on Social Security benefits and other income sources.

Taxation of Inherited Non-Qualified Annuities

Inheriting a non-qualified annuity presents a unique tax situation. Unlike other inherited assets where beneficiaries might face taxes on the entire value, non-qualified annuities are taxed differently. The principal, having already been taxed before funding the annuity, passes to the beneficiary tax-free. Only the interest earned on the annuity is subject to income tax. This distinction offers a significant advantage to beneficiaries, as it preserves a larger portion of the inherited wealth.

However, spouses often enjoy an additional benefit known as spousal continuation. This option allows the surviving spouse to essentially take over the annuity contract, continuing the tax-deferred growth and potentially delaying income tax on the accumulated interest until withdrawals begin. This can be a powerful estate planning tool, ensuring financial security for the surviving spouse while preserving the tax advantages of the annuity.

Starting a Non-Qualified Annuity

Funding a non-qualified annuity is a flexible process, with various sources available to potential investors. Savings, proceeds from asset sales, or stock profits can all be used to initiate an annuity contract. It’s crucial to remember that capital gains taxes might apply depending on the source of funds, so consulting a financial advisor can be beneficial to optimize the funding strategy.

One of the most attractive aspects of non-qualified annuities is their multifaceted benefits. They offer tax-deferred growth, allowing your investment to compound over time without immediate tax implications. The potential for guaranteed lifetime income provides a sense of financial security, especially in retirement. Moreover, they can be a powerful tool for asset allocation, diversifying your portfolio, and potentially reducing overall risk. Additionally, non-qualified annuities can play a role in estate planning, providing a means to transfer wealth to beneficiaries efficiently.

Furthermore, unlike some retirement accounts with annual contribution limits, non-qualified annuities offer unparalleled flexibility in this regard. This allows individuals to invest substantial amounts without restrictions, making them a versatile tool for high-net-worth individuals and those seeking to maximize their retirement savings.

Non-Qualified Annuities and 1035 Exchanges

Financial goals and circumstances can change over time, and your retirement strategy should adapt accordingly. A 1035 exchange provides a valuable mechanism for such adjustments. This IRS provision allows the tax-free transfer of funds from one annuity contract to another. This means you can switch providers, change investment strategies, or modify annuity features without triggering immediate tax consequences.

The flexibility empowers annuity holders to realign their investments with their evolving needs. For instance, you might shift from a fixed annuity to a variable annuity for potentially higher growth or adjust your income payout options as you approach retirement.

Determining Suitability

Choosing the right financial product can be a daunting task. Non-qualified annuities, with their unique features and benefits, may not be suitable for everyone. Therefore, it’s crucial to seek guidance from a qualified financial professional. They can assess your individual financial situation, risk tolerance, and long-term goals to determine if a non-qualified annuity aligns with your overall financial plan.

SafeMoney.com offers a valuable resource in this regard, providing access to a network of independent financial professionals who specialize in retirement planning and annuity products. Our expertise can help you navigate the complexities of non-qualified annuities and make informed decisions about your financial future.

You can easily find someone through our “Find a Financial Professional” section, or give us a call at 877.476.9723 for a personal referral. We’re committed to helping you secure your financial future.

An equity indexed annuity is simply a dated name for a fixed indexed annuity. Fixed index annuities came about in the mid-1990s.

They were intended as an option for retirement savers looking for alternatives to low-interest CDs and low-paying fixed-interest instruments, such as Treasury securities.

How the “Equity Indexed Annuity” Came About

Life insurance companies used different names in marketing fixed indexed annuities to the public. Since they are fixed insurance contracts and therefore under the authority of state insurance commissioners, the term “equity indexed annuity” eventually went out of vogue.

It made people think that a fixed index annuity was a securities product. However, it still remains a fixed insurance product regulated by the states to this day. There is no “equity” component at all to a fixed index annuity.

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How can a fixed index annuity help you with health costs, specifically certain long-term care expenses? Nowadays, many fixed index annuity contracts come with a provision called a wellness benefit.

In some situations where you need certain kinds of long-term care, the income from your annuity can be “enhanced” for a certain time period. Your annuity income can increase, often double, in order to help you pay for long-term care and its high costs.

This enhanced income generally lasts for a certain period, such as up to 60 months (or five years). The benefit can vary from indexed annuity contract to contract, so your financial professional can go over the details, pros, and cons of any contracts you may be considering.

How Likely Is It that Someone Needs Long-Term Care?

Statistics show that over 50% of those aged 65 or over will need some form of long-term care at some point in retirement. Couples in this age group have over a 50% chance of one of them needing this type of care at some point.

The costs of long-term care can be staggering in many cases. A year of home healthcare can easily cost anywhere from $50,000 to $55,000 per year.

Yearly residence in an assisted living facility costs around the same. Then a semi-private room in a nursing care facility can cost as much as $90,000 to $100,000 per year, depending on where you are in the country.

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Annuity laddering is a strategy in which someone buys or staggers several annuity contracts over some years. The goal is to maximize the benefits that you receive from the annuities, like guaranteed income streams, while managing risks such as interest rate risk.

Strategies for laddering annuities can give you more flexibility in your retirement plan. You can crack down on potential downsides, such as locking yourself into a reduced annuity payout while interest rates are low. That can be a helpful guard against inflation.

When you buy multiple annuities and then wait for some years to turn some of those contracts on, that gives them time for their contractual benefits to grow. You can have more higher lifetime income, or higher interest earnings for your money, as a result of this drawn-out strategy.

Depending on your situation, you may want to tap more than one annuity as part of a laddering strategy in order to maximize your benefits over time. Here are a few different laddering strategies that you can use with annuities to achieve this goal.

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