Innovative financial tools that feature tax-deferred growth, risk management benefits, and guaranteed income strategies.
Every year since 2000, Gallup conducts a study to determine the issues causing the most financial concern for Americans. Retirement has topped the list as “biggest financial concern” in every survey. In 2017, 54 percent of Americans said that they were concerned about having enough money to fund their retirement.
If you’re concerned about funding your retirement, you’re not alone. The good news is there are strategies and tools available to help you accumulate money, manage risk, and generate retirement income.
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One such tool is a deferred annuity. A deferred annuity is a financial tool that allows you to grow funds in a tax-deferred manner, generate guaranteed income, and possibly protect yourself from downside risk. Some of the benefits of deferred annuities include:
- Tax-deferred growth potential
- Downside protection
- Guaranteed Income
- Death benefit for loved ones
There are a variety of different types of deferred annuities, each with their own features and benefits. Below is a description of how a deferred annuity works, along with descriptions of each different type.
A deferred annuity is a vehicle usually offered by insurance companies to help individuals generate income or manage risk. As the name suggests, in a deferred annuity, you don’t annuitize the contract and create generate income immediately. Annuitization is deferred until a later date.
Rather, your contributions are deposited into a cash value account where they have the opportunity to grow. The manner in which they grow depends on the type of deferred annuity that you open:
a. Fixed Annuity
In a fixed annuity, interest is paid into your cash value on either an annual or monthly basis. The interest rate is determined when you open the contract and is usually locked in for a predetermined period, like one, three, or five years. After that period, the rate may fluctuate.
Your growth in a fixed annuity will never exceed the interest rate. However, you also won’t have downside risk. Most fixed annuities come with a principal guarantee.
b. Variable Annuity
A variable annuity gives you the option of investing in a wide range of “subaccounts,” which are similar to mutual funds. Most variable annuities offer a diverse subaccount lineup, giving you the ability to build an allocation that is consistent with your goals and risk tolerance.
In a variable annuity, you could have exposure to downside risk, depending on the nature of your investment choices. However, you could have greater upside potential in a variable annuity than you would in a fixed annuity. Also, some variable annuities offer optional features that provide guaranteed income or protection against market downturns.
c. Fixed Indexed Annuity
A fixed indexed annuity offers the market-linked upside potential of a variable annuity along with the downside protection of a fixed annuity. In a fixed indexed annuity, your contract value growth through interest payments, much like in a fixed annuity.
However, the interest rate is variable. When you open your policy, you choose from a menu of available market indices, such as the S&P 500. If the index performs well over a certain period of time, your interest for that period may be higher. If the index performs poorly, your rate could be lower. Either way, most fixed indexed annuities have a guarantee against loss, so you don’t lose money even if the index declines in value.
At their core, annuities are designed to provide guaranteed income. Immediate annuities do this through a process called annuitization, which happens just after the policy is opened. Your premiums are immediately converted into a stream of income payments.
In a deferred annuity, annuitization is delayed until a future date. Many deferred annuities are never annuitized. However, you can still use a deferred annuity to create guaranteed income.
Some deferred annuities offer optional features known as guaranteed minimum income benefits or guaranteed minimum withdrawal benefits. These features allow you to take a guaranteed minimum withdrawal amount from your annuity every year. That withdrawal is usually guaranteed for life, no matter what happens to your account value. Even if your contract value goes down, you still receive the income.
You can also choose to annuitize your deferred annuity. You might use a deferred annuity to accumulate assets over a period of time and then convert those assets into a guaranteed income stream through annuitization.
The death benefit is another key distinction between an immediate annuity and a deferred annuity. In an immediate annuity, your premiums are converted into income. When you pass away, the income stops, meaning there usually isn’t a legacy left for your loved ones.
Deferred annuities have death benefits that are paid out to your beneficiaries after you pass away. In fact, some deferred annuities even have option features that enhance and increase the death benefit.
Ready to determine whether a deferred annuity is right for you? Let’s talk about it. Contact us today at America’s Annuity to discuss your retirement goals and how a deferred annuity could help you reach them. Let’s connect soon and start the conversation.
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