/// By Andrew MacDougall
In simple terms, an Annuity is an insurance contract issued by a financial institution/insurance company that can be purchased by an individual to provide a guaranteed income stream over a specified period or for the rest of a person’s life. By making either a lump-sum payment or a series of premium payments over time, individuals will receive a return of regular disbursements in the future—typically utilized through retirement.
Annuities can be either immediate, with guaranteed payment distributions beginning right away, or deferred, where buyers purchase in advance or via multiple premium payments to allow monies to accumulate interest over time.
Furthermore, there are three types of deferred annuities: fixed, variable and fixed index. While traditional fixed annuities provide a steady, guaranteed interest rate for a specific number of years, variable annuities can possibly provide market returns on your investment — at the cost of greater risk. Fixed index annuities (FIAs) combine some of the characteristics of both.
The primary benefit of a traditional fixed annuity is the guaranteed interest on your principal. The main benefit of a variable annuity is the potential for higher uncapped growth tied to riskier market fluctuation. FIAs can be attractive for those approaching retirement because of the principal protection they provide coupled with the potential to earn higher interest than traditional fixed annuities, CDs, or banks—essentially providing some of the benefits of the stock market while helping to minimize the loss-risk.
An FIA earns interest on the principal up to a capped amount, based on the performance of an external market index such as the S&P 500. If the index goes down, the insurance company has purchased options on that index such that they don’t lose money. In years that the market performs well, the FIA purchaser will be credited earnings on their investments, but in years where the market drops, the FIA won’t credit the account any additional interest, but also won’t lose previously accrued interest or principal amounts. *
For individuals looking down the barrel of retirement who want to diversify their portfolio with a stable income stream and tax-deferred growth, annuities can be a good option—providing a predictable payment schedule and some protections against market volatility or the potential to outlive savings.
With market conditions currently up and interest rates likely to drop on the horizon, now could be a good time to consider adding an annuity to your portfolio. Not like they were decades ago, with high fees and liquidity issues, the wide variety of annuity products of today can be tailored to specific uses to offer a relatively stable solution to retirement income gaps that meet the parameters of your individual risk tolerance.
If you’d like to explore how an annuity might bolster and stabilize your retirement plans, don’t hesitate to reach out with any questions you might have.
*Any guarantees offered by fixed annuities are backed by the financial strength of the issuing insurance company. Indexed annuities are insurance contracts that may offer a guaranteed annual interest rate and some participation growth, if any, of a stock market index. Such contracts have substantial variation in terms, costs of guarantees and features and may cap participation or returns in significant ways. Surrender charges apply if not held to the end of the term. Investors are cautioned to carefully review an indexed annuity for its features, costs, and risks, Diversification does not guarantee a profit or protect against a loss.
