How Guaranteed Retirement Income Works

Annuities are an attractive option for individuals looking to secure a retirement income, and manage the risk of living beyond their savings. It is an insurance contract, whereby a financial institution pays out invested funds in the future in the form of a fixed income stream.

Annuities have a number of benefits, the most attractive being is the option of receiving a periodic income until death. Moreover, income tax is deferred to when you begin to make withdrawals or receive payments. You can make unlimited contributions and have a wide range of investment options to choose from.

There are two phases of an annuity. The accumulation phase is when it is being funded, and investments made are allowed to grow on a tax-deferred basis. The annuitization phase refers to the period after the payments commence. Agents and brokers selling annuities often receive commissions on their sale. However, a number of regulations apply to such financial products. A state-issued life insurance license and a security license are required of both agents and brokers selling annuity products. With annuities, your investment is illiquid, meaning you cannot sell the asset or withdraw from it without incurring penalties and in many cases considerable loss. That is why annuities are generally not recommended for people with liquidity needs. They may also not be ideal for younger individuals, given the greater number of years to retirement.

Annuities are classified into fixed and variable types based on their value. They are also classified into immediate and deferred types depending on when income payments are allowed. A fixed annuity offers payment of a set amount for the term of the agreement. On the other hand, the value of a variable annuity can vary depending on the returns on the mutual funds in which it is invested.

A cash lump sum can be converted into an immediate annuity terms of which allow immediate income payment. A deferred annuity on the other hand is a contract wherein an insurance company promises to make payment(s) to the owner in the future.

There are two main drawbacks for annuities. For one, brokers and agents selling annuities can collect commissions on them. And if they work for a captive firm, they might not be able to offer you the best annuity for your situation — meaning they could push one that suits their pocket and not represents your best interests.

Secondly, annuities are illiquid assets. This means there are substantial surrender charges for withdrawing money out within an initial set period from the time you buy it. They can be as high as 7% of account value for withdrawals in the first year, although the percentage amount progressively decreases in subsequent years. These surrender charges can vary on the annuity, which is why it makes sense to speak to an independent agent who scans the market for right one.

If you’re unsure about whether annuities are appropriate for your long-term financial needs, speak to a licensed insurance agent to explore your options. Kent Petticord is a licensed independent agent based in North Carolina with over 39 years of experience. To book a complimentary no obligation consultation click the link below.