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The Basics of Annuities

March 22, 2023

Annuities can be a helpful tool used in the retirement planning process. They can be an excellent way to protect assets against market fluctuations, inflation, or even outliving your money.

With annuities, several customizable alternatives are available; however, with careful planning and consideration of your unique retirement goals, you can select the ideal option.

Types of Annuities

There are three basic types of annuities:  fixed, fixed indexed, and variable.

Fixed annuities function like CDs but are backed by insurance companies. They allow your money to grow tax-deferred at a fixed rate and offer guaranteed yields for the time frame. Risk-averse investors tend to make great short-term investments. At the end of the period, you can withdraw your money along with a guaranteed increase. The yield on a number of fixed annuities is higher than a CD or Treasury.

A fixed indexed annuity (FIA) offers a safe medium- to long-term asset accumulation for investors with a cautious to moderate level of risk tolerance. With the help of a collection of index funds, such as the S&P 500, FIAs let you maintain a guaranteed fixed account while still investing in the market. They are an inexpensive way to safeguard and build your retirement savings. An FIA may be supplemented with a living rider benefit for a fee (often 1%), which provides assured growth and guaranteed lifelong income regardless of market performance. An FIA with no growth commitments and merely positive index returns would be an option (no fee). Both options provide some basic protection.

Another choice for investing over the medium to long term is a variable annuity, which has the highest growth potential but also the greatest risk because its performance is based on mutual funds and index funds (often for a 2% fee). Because they come in various forms, and some offer guaranteed growth and lifelong income for an additional fee (about 1%), variable annuities are a great option for persons with a high-risk tolerance. Typically, something other than this kind will protect the principal of your cash value.

Conversely, you can choose a maximum loss limit for your account with some variable annuities, which serves as a safety net to guard you from loss.

Why Annuities Are Important

Over the past 10 years, the stock market has experienced its longest bull run ever. Nonetheless, significant drops in 2000–2002, 2008, 2020, and 2022 have shown potential investors how turbulent the market can be and how important it is to have protection in your portfolio.

Annuities might help you de-correlate your investments if the markets fell. The majority of annuities, at the very least, provide principal protection, and some can produce a guaranteed rate of return notwithstanding market conditions. Also, an income rider might guarantee an income for a lifetime or numerous lifetimes. Because no other investment can offer those types of certainties, annuities are a great addition to your retirement income sources.

Choosing to purchase an annuity can help you protect and keep your hard-earned money in times of market instability. Choosing the best decision for your retirement may initially seem intimidating, but working with a qualified financial professional, like those at IM Wealth Partners, who has access to a range of annuity choices, can assist.