In the course of planning for retirement, making sure that you have a steady and guaranteed income, that at least meets expenses, is of paramount importance. That income can come from different sources. For example, social security, pensions and of course, any savings. If there is a short-fall, or a gap, in your guaranteed income sources vs. your expenses, then determining how you make up that short-fall is essential for retirement. It goes without saying that making up that gap is crucial for retirement. If you are lucky enough to not have a short-fall, determining how to structure assets with regards to asset allocation, tax efficiencies, etc., are additional considerations.
No matter what your circumstance is, the tricky part is deciding how to construct your portfolio to meet all your goals and objectives combined with other variables. For instance, no matter what your income needs are and financial situation, it will always behoove you to consider minimizing taxes. Everyone has their own risk tolerance and risk comes in many different forms. For instance, the obvious risk is in the stock market and the bond market. As we all know, any significant or even moderate downturn in the stock market can have a profound impact on your portfolio. Bonds (bond mutual funds) have their own risk. Rising interest rates will erode the value of bonds. Having all your money just in cash, or cash like vehicles, (CD, money market, etc.) will not keep up with inflation.
So how can you add an element of safety, security and guarantees while keeping up with inflation and insulating yourself from market downturns?
In their simplest form, an annuity is a guarantee from an annuity company (insurance) to provide income in the form of regular distributions. These distributions can start fairly soon, or can be deferred for a later date. If the “spigot” is not turned on, from a deferred annuity, the annuity vehicle will act as a tax differed savings vehicle.
History of Annuities
Annuities have been around since the late 1600s. They can be traced to the Hand In Hand insurance company in London in 1696. (Only insurance companies are allowed to offer annuities). As with all annuities, you put in a certain amount and get paid back for as long as you live. Over the last several hundred years, annuities have taken on many incarnations. Fast forward to today. Annuities are used to provide safe and secure investments with all important guarantees. Some people will never use it as income and just use it as a superior savings vehicle, other people will construct their annuity portfolio for both income and savings. Everyone’s situation is different and because of this you can pick and choose the type of annuities to meet your goals. Here is a breakdown of the types of annuities:
- Income riders that can be added to various types of annuities that help structure your own private pension plan.
Common Annuity Attributes
All annuities can be part of qualified and non-qualified monies.
- Qualified monies are IRAs, 401(k)s, Seps, etc.
- All annuities have a beneficiary designation and therefore avoid probate
- All non-IRA annuities grow tax deferred. This is a huge advantage as taxes are not paid until distribution starts or claims are paid out in the form of a death benefit.
All annuities have guarantees and as such, are meant to be put into the conservative “bucket” designation of your portfolio. However, because of their many uses, annuities have their own special classification within the conservative realm.
Annuities are becoming more popular
As traditional pensions are being discontinued, annuities are becoming increasingly popular. In the United States alone, as of 2016, there are over 2.03 trillion dollars invested in annuity vehicles*. This is also a worldwide phenomenon as there are multiples of that in overseas markets.
This is a very broad overview of annuities and we will be delve deeper into the inner workings of annuities in our upcoming weekly blogs. These topics will include:
- The many types of annuities and their uses
- The common myths of annuities
*per the US Department of labor and statistics