Annuities help you grow your retirement income. It is a contract between you and an insurance company that requires the insurer to make payments to you, either immediately or in the future. You buy an annuity by making a lump-sum payment or series of payments. Similarly, in return, you receive either a single payment or as a series of payments in the future. I’m Lea Wiviott Boracchia of Boracchia Wiviott Insurance Services and Boracchia Wiviott Wealth Partners, an investment adviser and insurance brokerage. In this article we review Annuities, lifetime income and how they can at times fit in client’s retirement portfolios.
In the US annuities became popular during the great depression when people started worrying about stock market volatility endangering their retirement. These day pension plans are becoming less common and many retirees are looking towards annuities as an option to replace income stream. The primary benefits of purchasing one include the potential for guaranteed lifetime income and the option to leave money to your beneficiaries. Some annuities may help pay for long-term care costs.
How does an Annuity work?
When you buy an annuity you enter into a contract with an insurance company to provide you income which is typically during retirement. You make a single payment or pay in a series of payments usually to a certain age for the annuity, and the insurance company invests your money. Then during your retirement, you receive regular payments from the insurance company, depending on the kind choose.
An annuity works by transferring risk from the owner to the insurance company supplying it. With increasing life spans, less pensions, insecure future of Social Security, and people finding it difficult to save for their retirements, annuities can be appealing since they reduce the risk of making critical mistakes with your investments.
Unlike many other types of insurance, you are not supposed to pay annuity premiums indefinitely. Eventually, you stop paying and begin to receive payments from the annuity. When this happens, your contract enters in the payout phase.
Annuities make payments to you for a fixed number of years or for a lifetime, until you and your spouse have passed away. When you are paid for life with a period certain annuity and you die during a specified time frame, the remainder of your payments for the contractual period you selected at the time of application will be paid to your beneficiaries.
There are different types, but all boil down to essentially the same thing, an insurance company that pays guaranteed money either for a lifetime or for a specific period of time.
An immediate annuity starts paying income immediately after you make a lump-sum payment to the insurance company. Basically the period depends on how often you choose to receive income payments. For example: if you choose a monthly income, then your very first payment will come one month after you purchase it because payments begin very soon. Benefits of Immediate Annuities expire when you die unless you buy a rider to provide for beneficiaries.
A deferred annuity begins its payout at some point in the future chosen by the buyer. You have a choice either to pay lump-sum, a series of payments, or a combination of both. A Deferred Annuity is basically a long term retirement plan. This type has higher guaranteed monthly payments because incomes are delayed for several years. A deferred annuity is aimed at people who are still some years from retirement and don’t need money right away.
Fixed annuities work by providing periodic payments specified in the contract (usually five or ten years). They pay guaranteed rates of interest, typically higher than banks’ CDs and you can withdraw income immediately. As long as the insurance company is financially sound, the payment you made in a fixed annuity will grow and will not drop in value. You can convert fixed annuities to an immediate one at any time to start collecting a guaranteed income payout.
A variable annuity comes with more risks and potentially higher rewards. With a variable annuity, your money is invested in a variety of subaccounts, similar to mutual funds. The amount you receive from variable annuities varies depending on how much money the portfolio gains or looses. State insurance departments, as well as federal securities and exchange commissions regulate them. The upside is that you have a lot of control over your investment dollars. You are offered a maximum stock market exposure.
Whatever is keeping you up at night, including market volatility, we can help alleviate a lot of these anxieties. Call Boracchia Wiviott Wealth Partners for your complimentary consultation today. (424) 625 – 8943
How Annuities Fits in Client’s Retirement Portfolio:
As a client, your goal is to boost your retirement income potential. Having annuities as a portion of your portfolio makes it easy to achieve your retirement goals. Including them in your portfolio reduces the odds that you will run out of money in retirement.
Adding annuities to your retirement portfolio can maximize your lifetime income. A portfolio including deferred or immediate annuities results in a higher income level throughout your retirement and then a greater amount of legacy assets available to your beneficiaries.
Choose the one that best suits your Portfolio:
- Immediate annuities start paying immediately which makes them suitable for those clients who are retiring now, or who have a large settlement of some sort.
- Variable annuities go up and down with market rates. These annuities are suitable for those clients who are willing to get more control over their future investment gain.
- Deferred annuities fit in the retirement portfolio of clients who don’t need money right away because they offer payouts that begin later time.
Certain life insurance policies include cash value which can accumulate tax-deferred growth on a compounding basis, and with guarantees by the insurance company. Thus these can be annuitized just like a purchased annuity. The earlier you begin, the cheaper many policies are!
What percentage of annuities to include in your retirement portfolio:
- Conservative: Create a retirement portfolio that is 20% stock, 60% bonds, and 20% guaranteed income from an annuity.
- Moderate: Build a portfolio that includes 40% stocks, 45% bonds, and 15% annuity income.
- Aggressive: Create a portfolio consisting of 60% stocks, 30% bonds, and 10% annuity.
Once you’ve figured out a suitable type of annuity to be included in your retirement portfolio, allocate the percentage, bonds, and stocks you identified above and let us help determine if an annuity is indeed suitable in your financial situation.
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