Fixed Annuities & You. A Brief Introduction

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1 Fixed Annuities & You A Brief Introduction 1

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3 What is an annuity? An annuity is a contract between you and an insurance company; it provides unique retirement planning benefits. Annuities are purchased to build a nest egg for retirement and can allow for certain tax advantages over traditional alternatives. When an annuity is used for income in retirement, the owner may choose to receive payments for the rest of his or her life. There are two major types of annuities in the world fixed and variable. Variable annuities are securities and operate much like mutual funds in that most of the investment return and risk is passed to the investor. Fixed rate annuities operate more like an account at a bank paying a stated rate of interest (although annuities are not bank instruments). Fixed indexed annuities pay a minimum rate and the potential for more interest, depending on the performance of an independent index. The remainder of this booklet will focus on fixed annuities. Here s how an annuity works: after purchasing the annuity, you can begin to take an income immediately or defer the payments, all the while still building your retirement nest egg. Depending on when you want or need income, the insurance company makes payments to you based on your choice for a set time period, for the rest of your life, or for the rest of you and your spouse s lifetimes. What are the advantages of a fixed annuity: Fixed annuities have several advantages that can be beneficial in retirement planning: Tax-Deferral: Annuities grow tax-deferred. With a taxdeferred annuity, you pay no taxes on your interest until it is withdrawn. You will earn interest on your initial premium, AND on the money you would have used to pay taxes, which can significantly affect the growth potential of your retirement nest egg. For example, if you are receiving a 3% tax-deferred interest rate, to receive the equivalent return in a taxable account, it would take 4% assuming a 25% tax rate, 4.17% assuming a 28% tax rate, 4.48% assuming a 33% tax rate, and 4.62% assuming a 35% tax rate. Guaranteed Lifetime Income: Annuities may be turned into a lifetime income stream. With medical advances prolonging our lives for decades longer than in previous 3

4 generations, the risk of outliving your money is becoming more prevalent. Annuities protect against longevity risk, and the need for ensuring that income for life is guaranteed, no matter how long you live. Bypass Probate: Annuities may bypass probate. If you are leaving money to your heirs, even a will is subject to the probate process, a costly and public evaluation of your goods and assets, before they are distributed to your intended beneficiaries. With a current, properly named beneficiary, annuities bypass probate, saving retirees an average of 10%* of their assets in fees and keeping these assets out of the public eye. * No Downside Risk: Sure, being in the stock market has its rewards and its risks but have you ever considered the time a market loss can cost you? Take a look at the chart below to see how much time it would take to make up for that loss: Market Loss At a 3% return, At a 6% return, you d need: you d need: 10% 3.6 years 1.8 years 20% 7.5 years 3.8 years 30% 12.1 years 6.1 years 40% 17.3 years 8.8 years 50% 23.4 years 11.9 years In addition to time needed to recover from market losses during accumulation, when you retire and what return you earn on your retirement assets in early retirement years is important. Besides being concerned with the market s rate of returns, retirees and pre-retirees need to be aware of the importance of the sequence of returns. Sequence of returns refers to the order in which returns occur and the impact of those returns on the total value of the account. The sequence of returns, once taking an income stream, can have a drastic effect on how long your retirement income lasts. If a bear market happens at the start of retirement (the EBY or Early Bad Year Effect) the retiree s portfolio may be unable to recover and this may result in insufficient funds in later years. Using immediate annuities or annuities with guaranteed lifetime withdrawal benefits can allow the retiree to avoid tapping into their investment portfolio during bear markets thus giving them time to recover. 4

5 Liquidity and Access to Money: With an annuity, you can access your money when you need it. Annuities feature free withdrawals, which usually allow the owner to withdraw up to 10% of the account value without penalty each year, until the end of the contract term, when all the money is available. Annuity terms vary, but most last from three to fifteen years. CDs typically require termination with a penalty if money is needed before the CD matures. What assets should I consider moving into a fixed annuity*? Certificates of Deposit Mutual Funds 401(k) 403(b) Pension Buyout Who buys an indexed annuity? Under current tax law, the Internal Revenue Code already provides tax-deferral to IRAs, so there is no additional tax benefit obtained by funding an IRA with an annuity; consider the other benefits provided by an annuity such as lifetime income and a Death Benefit. People purchase an indexed annuity because they want the potential to possibly earn more than they might make from another savings vehicle. If you have sufficient time to recover from potential losses (and the stomach for the volatility), stock market investments will likely give you a higher return than index annuities. However, if your time frame is too short to recover from a possible bad market, or you simply don t like the idea of potentially losing principal in the market, indexed annuities can be used as an alternative savings vehicle to bank instruments, fixed rate annuities, bonds and bond mutual funds. Common Questions: I heard that there could be penalties if I close an annuity early. Is that true? Yes, there are penalties if you withdraw more than a free withdrawal before the annuity term has been fulfilled. Remember, generally annuities are products intended for long-term use. 5

6 What happens if I die when I have an annuity? If you have not started your income stream, the funds will pass directly to your named beneficiaries. If you have selected an income stream, it depends on the form of income you have chosen. In some cases, your beneficiaries will receive payments left for the term of income you selected; in some cases they will receive what is left of your account value; in some cases all payment will stop and no benefit will be passed onto your beneficiary. In any case, probate can be bypassed by keeping your beneficiaries current and properly named. This will ultimately end up saving your heirs unnecessary costs and delays. Working with a licensed insurance professional to determine the best option for you and your family is the best way to ensure you pass on as much as you can, and have your beneficiaries properly named. How can I tell if a particular annuity is a good choice for me? The best way to be certain is to meet with an experienced professional in the field of fixed products, including annuities. Take the quiz at the back of the booklet. If any of your answers are yes, you owe it to yourself to talk to a licensed insurance professional about annuities and determine if they are appropriate for your circumstances. I ve heard annuities are expensive. Is that true? First answer the question: Compared to what? Nothing is expensive or inexpensive except by comparison to something else. The costs and benefits of one type of annuity are different-sometimes, VERY different from the costs and benefits of another type. Annuities may be the safest choice you can make. Every annuity contract requires the insurance company to set aside money in reserves equal to your premium, as well as the interest guaranteed on the contract no matter how large of an annuity you purchase. As well as offering upside potential and protection from downside risks, annuities have the additional advantages of tax-deferral, free withdrawals, probate bypass and guaranteed lifetime income. We encourage you to investigate their benefits further to see if they are a fit for your plan by setting an appointment for a no-cost, no-obligation review with a licensed insurance professional. 6

7 Are you interested in a secure way to save for retirement? Do you have some disposable money that you do not need for your current and anticipated living expenses? Are you interested in earning more interest in a longerterm product? Would you like access to your money for those rainy day needs? Do you prefer to have your principal guaranteed and not subject to market ups and downs? Did you answer yes to any of these questions? If so, Annuities may be perfect for you. Ask your insurance professional for a no obligation interview. Respond and learn how annuities can be used in various planning strategies for retirement. Annuities are not FDIC insured; are not obligations or deposits of, and are not guaranteed or underwritten by any bank, savings and loan or credit union or its affiliates; are unrelated to and not a condition of the provision or term of any banking service or activity. Annuities are long-term products of the insurance industry designed for retirement income. They contain some limitations, including possible withdrawal charges and a market value adjustment that could affect contract values. This material has been prepared for informational and educational purposes only. It is not intended to provide, and should not be relied upon for, accounting, legal, tax or investment advice. Please consult with a professional specializing in these areas regarding the applicability of this information to your situation REVISED 10/2012 7

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