Top 5 Annuity Tips

Annuities can be a great part of your retirement portfolio because they are typically designed so that you do not outlive your money. With people living longer these days due to improved health education and medical advances, annuities are an important part of a diversified retirement portfolio and can augment other parts of your retirement like social security and IRAs.

Monument Financial Group - Annuities Provide Income for Life

Protect Your Financial Future with an Annuity so you Don’t Outlive Your Retirement Income

Here are 5 great tips that you can use to get the best results out of the annuities that you choose to use as  of your financial plan.

1. Minimize Management (& Other) Fees

Always look at the fees that administrators charge for annuities. These fees can vary greatly. Similar to mutual funds and other investment options that also include management fees, the fees work against your gains so make sure you understand their  impact on your overall return.

2. Select the Right Type – Fixed, Variable or Indexed Annuity?

The 2 most common annuities are fixed and variable but there is a third type that is less well known but offers numerous advantages.

With a fixed annuity, the amount of your payout is based upon a fixed interest rate. Fixed annuities are ideal for someone seeking a minimum guaranteed rate of return with minimal amount of risk.

On the other end of the spectrum are variable annuities that have variable payout amounts based on the gains/losses of an underlying equity or fixed-income (stocks and/or bonds) investment. A key consideration in selecting the underlying investment is to understand the amount of risk you are willing to incur and the options that are most aligned to your target level of risk and desired return.  This article provides great insight into the relationships between risk, reward and volatility. 

The third option, an indexed annuity, might offer an attractive ‘middle ground’ to you if you want better returns than a fixed annuity without the potential for losses which can and will occur with a variable annuity during major stock market downturns.  Indexed annuities do not directly participate in any investments but instead participate in a stated percentage of an increase in an index. This increase is usually ‘capped’ to a certain level and this defines the upper limit or ‘ceiling’ of the return.  But, to protect against the market risk, they also have a ‘floor’, often set at 0%, to protect against loss.  For example, an index might have a floor of 0% and a cap of 7% so your return in any given year will always be between this range (before fees).

Monument Financial Group - Indexed Account Performance
Monument Financial Group – Indexed Account Performance

3. Maximize Contributions

One of the most popular aspects of many annuities is that they are exempt from the maximum contributions associated with other types of retirement-focused accounts like 401(k)s and IRAs (Traditional and Roth). This can be very attractive for those that were not able to contribute in their early years and are trying to ‘catch up’ right before their retirement. 

4. Avoid Penalties

Take care not to remove money from your annuity too early. Most annuities, similar to 401(k)s and IRAs, have penalties for withdrawals before the age of 59 ½. Make sure you defer withdrawals and age 59 ½ or older to avoid the 10% ‘early withdrawal’ penalty.

5. Watch Your Tax Bracket

One of the main objectives of annuities and other retirement accounts is to defer taxes into your retirement years. The main assumption here is that in your retirement years, you have less total income and therefore a lower tax bracket.

However, there are exceptions to this. Suppose you will receive a significant financial ‘windfall’ in a particular year and it will push you into higher tax brackets. It may not be prudent for you to take your normal annuity draw in that year, if it is an option, since you will be in a higher marginal tax bracket. Again, planning ahead can help reduce the total tax liability you incur in any given year.  

The professionals at Monument Financial Group can help you determine whether an annuity makes sense for you based on your retirement goals, time horizon and your risk/reward profile.   Many of our clients understand that a product like an annuity, which can  offer income for life, is a great addition to their retirement portfolio and a great way to Save, Grow and Protect for their financial future. 

Leave a Comment

Your email address will not be published. Required fields are marked *

Money 101 Workshop on January 14 @ 11:30 am Mountain