Annuities

In the past, retirees could typically count on three sources of retirement income that divided roughly into thirds. The three sources of income have traditionally been government funded Social Security, employer-sponsored components, and individual savings. With this traditional scenario, both the government and employer-sponsored components of the plan were considered predictable—reliable income sources that may also be adjusted for inflation. Only one-third of the plan, individual savings, was the responsibility of the individual.

Today, however, due to employer-sponsored plans evolving from guaranteed pension payouts to more defined benefit contribution plans, which generally result in a payout in retirement based upon level of individual participation, the majority of the burden for retirement income seems to have shifted to the individual. For this reason, you may want to consider a guaranteed* fixed income component to your retirement strategy. In short, adding an annuity may be an opportunity to help ensure a portion of your retirement income will be guaranteed*.

An annuity is a contract you purchase from an insurance company. For the premium you pay, you receive certain fixed and/or variable interest crediting options able to compound tax deferred until withdrawn. When you are ready to receive income distributions, this vehicle offers a variety of guaranteed* payout options. Most annuities have provisions that allow you to withdraw a percentage of the value of the contract each year up to a certain limit. However, withdrawals can reduce the value of the death benefit and excess withdrawals above the restricted limit typically incur “surrender charges” within the first five to fifteen years of the contract. Withdrawals will reduce the contract value and the value of any protection benefits, and because they are designed as a long-term retirement income vehicle, annuity withdrawals made before age 59½ are subject to a 10% penalty fee and all withdrawals may be subject to income taxes.

It is important to note that not all annuities are the same. Some annuities come with great benefits at little or no cost, while others include fees higher than 4% annually. It is important to know what kind of annuity you have, as well as what the costs and benefits are. Your retirement income could depend upon it.