How Annuities Work: A Guide for Retirement Planning
If you’re part of the millions of Americans considering buying an annuity, it can be overwhelming to navigate through all the information available. Dewitt & Dunn is here to help you find a solution to work toward protecting your retirement savings. During market crashes like those in 2000, 2008 and 2020, retirement portfolios suffered significant losses. However, with a Fixed Index Annuity, one of the four types of annuities, you can help increase the odds that your retirement savings may not be affected by market downturns.
Before we delve into the four types of annuities, let’s start with the basics: What is an annuity and discuss how annuities work. An annuity is an insurance contract that provides you with guaranteed income. You can fund an annuity with a single premium deposit, or with a series of premium payments. Depending on the annuity you select, you may start receiving income immediately, or at a future time of your choosing.
The Four Types of Annuities
1. Immediate Annuity
An Immediate Annuity starts paying income checks right after you fund it with a lump sum premium deposit. These income checks usually begin within 30 days and continue for the rest of your life, or for as long as either you or your spouse is living. It is important to read the fine print when selecting an immediate annuity. Some contracts offer a higher income rate, but do not pay any residual cash balance to your heirs if you pass away.
2. Fixed Annuity
A Fixed Annuity guarantees a fixed rate of interest for a fixed period of time. It’s similar to a CD, but with the advantage of tax-deferred growth. This means you don’t pay taxes on the interest earned until you withdraw it. However, be cautious of multi-year contracts that offer attractive interest rates for the first year but may be subject to change afterward.
3. Variable Annuity
Variable Annuities gained popularity among baby boomers over 50 years ago due to their tax-deferred growth. You can invest in mutual funds inside a tax-deferred insurance vehicle without investment limits. However, variable annuities are not principal-protected, meaning your cash value can decrease if the underlying investments go down.
4. Fixed Index Annuity
A Fixed Index Annuity has features in common with other annuities while eliminating some of their drawbacks. It has grown in popularity due to its ability to protect your principal and lock in market index gains. With an FIA, your return is based on the performance of market indexes, but your money is not directly invested in the market. When your strategy period – the length of time you are tracking an index or indexes – is over, any gains credited lock-in and are protected against future loss. If the indexes you are tracking decline, you will gain nothing and lose nothing for that strategy period. You may elect to create a guaranteed income stream from your Fixed Index Annuity, but it is not required.
Why Consider A Fixed Index Annuity?
The Fixed Index Annuity offers benefits of Immediate and Fixed Annuities, including the ability to generate guaranteed lifetime income, and principal protection. It also eliminates some drawbacks, such as the possible lack of a death benefit in Immediate Annuities and potentially lower rates of return in Fixed Annuities. Additionally, it doesn’t expose you to the risk of losing cash value like Variable Annuities.
Seeking Expert Advice
Choosing the right annuity can be complex, especially with hundreds of options available. To make the best decision, consider working with an independent annuity expert like Cathy DeWitt Dunn from DeWitt & Dunn Financial Services. Cathy has helped thousands of individuals and families protect and grow their retirement assets without losing a penny due to market volatility.
Finding an Annuity Expert: Important Questions to Ask
- Is the person you are considering working with independent, or are they selling specific products?
- How long have they been in the business, and how many people have they helped?
- Will they provide client references for you to talk to?
- Does their educational material make sense and do they provide time to answer your questions?
- Can they answer all your questions and make you feel comfortable?
In conclusion, understanding how annuities work is crucial when planning for a secure retirement. A Fixed Index Annuity can offer many benefits, including principal protection and the potential for interest credits. To learn more watch Cathy’s free educational video series, Securing Your Retirement Future. These videos provide insights on fixed index annuities and their role in your retirement income planning. Remember, choosing the right annuity for you is essential, so make sure to work with a trusted annuity expert like Cathy DeWitt Dunn.