Using Annuities for Growth and Income Goals

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After years of hard work, all of us want a comfortable retirement. But it may be unclear as to what we need to achieve this. What steps are necessary for a worry-free financial life – the ability to spend with confidence?

Part of it means a transition in thinking. In real-world terms, it encompasses a shift in focus from asset values to monthly income. We want to be sure we have sufficient cash-flow for funding a retirement lifestyle. On the other hand, we should also be attentive to the matter of preserving wealth. With all those savings accumulated over many years, our money will now need to last for the rest of our lifetime.

However, this doesn’t mean that savings growth has to be put on the back-burner. For Americans looking for “safe money financial” vehicles, annuities may be attractive. In particular, fixed-type annuities can offer guaranteed lifelong income, tax-deferred accumulation, and growth via guaranteed interest rates or rising index values.

If you are investigating fixed annuities or fixed index annuities for personal growth or income goals, here’s a quick look at a few variables to consider.

Scenarios to Keep in Mind

Ask how interest is calculated. How interest is credited to an annuity will differ from contract to contract. In the case of fixed annuities, insurance companies give a fixed interest rate for a set period. Once this time-frame has passed, there will be a renewal rate should you decide to stay within your contract. The guaranteed interest rate will vary, mostly depending on how long your contract term lasts for.

On the other hand, fixed index annuities involve a variety of measures for interest earnings. You may recall that fixed index annuities come with a participation rate, crediting method, and cap – all of which are part of how your contract earns interest.

Some fixed index annuity contracts come with a 100% participation rate – which credits your contract all of the linked index increase. Others have a lower participation rate, say 70- 80%. But this may be balanced with a higher cap on interest earnings. Ask for the full details of how the interest rate is calculated and credited, including the participation rate, cap, spread, crediting method, and any other influential factors. Be sure to clarify what measures are at the insurance company’s disposal to change those terms.

In terms of income, understand your money access options. Annuities are one of the few vehicles to offer guaranteed income. But you do have some options for money access, including:

  • Converting contract value into an income stream and receiving lifelong payments – annuitization
  • Enjoying ongoing income payments and retaining money access – lifetime income rider benefits
  • Taking money from your contract in a lump-sum

While your contract approaches maturation, you can withdraw up to 10% of your contract value without penalty. Once the contract has matured, those penalties go away. When considering any fixed annuity, be sure you understand the following:

  • Does the contract come with forced annuitization? Once you annuitize your contract, it is irreversible and your contract value stays as an income stream indefinitely.
  • Most fixed annuity or fixed index annuity contracts don’t come with forced annuitization, but it is worth clarifying to be sure.
  • How long does the “penalty period,” or surrender period, last for? These time-frames are set so your insurer can protect your money and let it grow safely, and they vary from contract to contract.
  • If you would like to maximize retirement income with annuities, these sorts of contracts can be advantageous in “annuity laddering” strategies. Or in other words, where annuity contracts are “laddered” together to capitalize on the timing and contract terms for greater income amount per premium dollar.
  • If you worry about access to all your money, you may want to consider pairing your annuity contract with a lifetime income rider. Some income riders will let you turn income payments on and off at will, with some limits.

What is the Bottom Line?

If they fit your personalized financial circumstances and profile, annuities can be a great solution for greater financial security. There are thousands of contracts in the market, so be sure to work with the right annuity advisor to help you understand all your options.

If you're ready to connect with a financial professional and see if an annuity is right for you, Safe can help you. Use our Find a Licensed Advisor section to connect directly with an independent financial professional, and to request a personal strategy session to discuss your needs and goals. And should you have any questions or concerns, call 877.476.9723.

Author: Ian

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