ANNUITIES…and Preparing For Retirementby John McCartin
What Is an Annuity?
An annuity is a contract sold by life insurance companies that guarantees a fixed or variable payment to an annuitant either immediately, or at some future time – usually retirement. Annuities accumulate tax-deferred however; funds may not be withdrawn until the age of 59 ½ without incurring a 10% penalty. There is no limit as to the amount of money you can contribute to an annuity.
Fixed annuities can be invested primarily in government securities and investment grade corporate bonds. The principal and interest are offered at a rate guaranteed by the issuing company. The annuity will usually pay a minimum stated rate of return for a stated period of time, varying only with the payout method elected. The guarantee is backed by the financial stability of the insurance company.
A variable annuity usually offers a range of investment options. The value of the investment will vary, depending on the performance of the investment options, known as sub-accounts, that you choose. Available choices range from conservative, such as money markets; fixed accounts; and government bond funds, to more aggressive choices such as growth; capital appreciation; and emerging growth funds. When choosing sub-accounts, you must decide which are right for you by matching them to your investment objectives. By allocating portions of your investment into different asset classes, it may be possible to achieve a balance between risk and potential reward that is suitable depending on your comfort level and time horizon. Some annuities also offer a death benefit whereby the issuer guarantees, at a minimum, that upon your death your total premiums invested are paid to your beneficiaries. There are various fees to be aware of in a variable annuity including surrender and mortality and expense charges (M&E). Some annuities allow you to withdraw either interest earnings or up to a certain percentage per year without penalty. However, most annuities have a surrender charge, a penalty for making an early withdrawal above the free withdrawal amount. Typically this surrender charge decreases over a seven-year period. M&E charges pay for the insurance guarantee, selling, and administration expenses of the contract. Before investing, you should always read the annuity prospectus for a complete schedule of all fees and expenses within the particular annuity you may be considering. To find out if an annuity is right for you, please contact your financial professional.
About the author:
John McCartin is also President of McCartin Financial located in San Diego, CA. For over 25 years, John has been providing retirement planning services to San Diego residents and helping to build their safe nest eggs.