Annuities: The Good, the Bad and the Ugly

The term annuity isn’t one that comes up around the dinner table on a daily basis, but it’s an important one to understand if you have reached retirement or are getting close. At its most basic level, an annuity is a financial product designed to increase your financial security as you begin your golden years. You pay a premium to a financial institution, and in time you are repaid in either a series of payments or one lump sum.

Deferred annuities can be purchased while you’re still earning money, and immediate annuities are often purchased in retirement. Variable annuities are available in addition to fixed and fixed index annuities. Your California financial advisor with Safeguard Investments can help you understand the differences, costs and benefits of each.

While you may not regularly discuss annuities as a family, they are a hot topic in the world of financial planning. So what’s good about them, or bad? Does it ever get ugly? Read below for the basics about how annuities could play into your retirement planning.

one-dollarThe Benefits of Annuities

Annuities are tax-advantaged, meaning taxes can be deferred as they grow. When it comes to variable annuities, you can also receive a death benefit in case you pass away before receiving payments. For fixed index annuities, your money is tied directly to a financial index and has flexible interest rates. Furthermore, compared to other kinds of investments, these may better protect your money from major stock market risks.

How to Avoid the Bad and the Ugly

Big financial companies and insurers love selling annuities, because these products can make them a lot of money. Our advisors can help you understand how some of these institutions count on a certain number of annuity-holders passing away before their benefits are paid out. That means for some annuities, you need to evaluate your likelihood of living until payments begin.

If you are considering an annuity, make sure you also know about its fees. With a deferred variable annuity, the investor chooses among a list of sub-accounts managed by the provider. You can buy, sell and trade freely. However, fees on these sub-accounts can be higher than if this money were invested in a different way. You can also be charged an annual contract fee, so don’t forget to calculate that as you plan. Furthermore, don’t forget surrender fees. With deferred annuities, your money is locked in until the contracted withdrawal date. Retrieving it could cost 10 percent.

Also, like many other kinds of retirement accounts, annuities are tax-deferred until payments start, but then withdrawals of interest are taxed at ordinary income tax rates. Inheritance taxes and others may come into play once you have withdrawn all the interest, but each plan is different so be sure to ask questions.

Furthermore, the full value of annuity is only as good as the guarantor – the insurance company, which could fail. In California, you may also be entitled to compensation from state funds in this scenario, but it’s unlikely that this will cover the full value of the policy. Depending on your situation, maximum amounts between $100,000 and $300,000 may be available.

Talk to Your California Financial Advisor Today

Annuities can be a great retirement planning and investment tool, and our advisors can help you understand the risks and benefits of all your options. Call or come in for a free consultation. We are located within easy reach of Folsom, Granite Bay, Anaheim Hills and Temecula. We can be reached at (916) 966-3040 or by filling out this form.

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