Many Americans worry about running out of money in retirement Opens a New Window. -- or not having enough savings to maintain the lifestyle they have planned Opens a New Window. . In addition to Social Security benefits Opens a New Window. and pensions, annuities are one of the few retirement options that can provide guaranteed income for your lifetime.
“It can serve as longevity insurance—a hedge against the financial risk of living to a very old age,” says annuity expert Ken Nuss, CEO of AnnuityAdvantage.
Should annuities be included in your retirement plan? Nuss discussed with Fox Business what you need to know.
Boomer: What risk is there for losing money with an annuity?
Nuss: With any type of fixed annuity, extremely low risk. All fixed annuities guarantee your principal. Fixed annuities are guaranteed by life insurance companies, which are strictly regulated by the states to ensure solvency.
In the highly unlikely event of the insurer’s insolvency, you are also protected by state guaranty associations up to certain limits that vary by your state of residence. There are penalties for canceling the contract before maturity – but most fixed annuities permit partial withdrawals.
Variable annuities are different. Like mutual funds, their value will fluctuate with the stock and bond markets. You can lose money with a variable annuity, especially if you choose the more volatile funds within one.
Boomer: What is the biggest mistake people make when buying an annuity?
Nuss: Not making sure that it’s the right choice to start with. Not shopping around – only looking at one insurer’s offerings.
Boomer: If I have $100,000 to invest, what can I expect an annuity to pay out?
Nuss: It depends on the type of annuity, but for example, a five-year fixed-rate annuity (a so-called CD-type annuity) now pays up to 4 percent, or $4,000 a year the first year. Assuming your reinvest the interest, as you should, in year two it will pay 4 percent interest on $104,000 and so on.
At the end of five years, you can roll the amount over into a new annuity and continue to defer taxes. Or you may annuitize the contract or roll it over to a deferred income annuity or immediate annuity to create a stream of guaranteed lifetime income.
The amount of income will depend on your age, the insurer and policy features.
Boomer: When considering whether annuities are right for my retirement plan, what questions should I be asking myself -- and the plan admins?
Nuss: Begin with these questions:
No. 1: How much income will you need in addition to what you will receive from Social Security and your pension (if applicable)?
No. 2: Will you need supplemental income for anyone else in addition to yourself?
No. 3: How long do you plan on leaving money in the annuity? (Keep in mind that annuities are long-term commitments).
No. 4: When do you plan on needing the annuity's income payments?
No. 5: Will you be able to gain access to the funds from the annuity if you should need them?
No. 6: Do you want a guaranteed interest rate with a fixed annuity and little to no risk of losing the principal, or are you willing to risk losing principal for the chance of higher earnings that are not guaranteed?
No. 7: Do you have enough cash reserves to meet expected needs?
Author: The Boomer
Source: FOX News Network, LLC.
Retrieved from: www.foxbusiness.com
FINRA Compliance Reviewed by Red Oak: 881818
Fixed Annuities are long term insurance contacts and there is a surrender charge imposed generally during the first 5 to 7 years that you own the annuity contract. Withdrawals prior to age 59-1/2 may result in a 10% IRS tax penalty, in addition to any ordinary income tax. Any guarantees of the annuity are backed by the financial strength of the underlying insurance company.
Indexed annuities are insurance contracts that, depending on the contract, 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. Any guarantees offered are backed by the financial strength of the insurance company. Surrender charges apply if not held to the end of the term. Withdrawals are taxed as ordinary income and, if taken prior to 59 ½, a 10% federal tax penalty. Investors are cautioned to carefully review an indexed annuity for its features, costs, risks, and how the variables are calculated.
Please consider the investment objectives, risks, charges, and expenses carefully before investing in Variable Annuities. The prospectus, which contains this and other information about the variable annuity contract and the underlying investment options, can be obtained from the insurance company or your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.
The investment return and principal value of the variable annuity investment options are not guaranteed. Variable annuity sub-accounts fluctuate with changes in market conditions. The principal may be worth more or less than the original amount invested when the annuity is surrendered.