For years, Americans have looked to the stock market to help meet their long-term retirement needs. Unfortunately for those near or in retirement, market gyrations can wreak short-term havoc with even the best designed pension funds, 401(K) plans and individual retirement accounts. For investors in need of retirement income stability, now may be a great time to consider the benefits of fixed annuity, including the retirement income stream it can provide.
A fixed annuity is a contract made with an insurer in which an individual makes either a lump sum payment or a series of payments, and the insurer agrees to pay that money plus interest back in a lump sum, over a fixed period of time, or for as long as the individual lives.
With the guaranteed interest rates of a fixed annuity, investors avoid market volatility. Typically, the insurer supports these guarantees by investing in a well-balanced portfolio of quality corporate bonds, government securities and real estate, leaving the investor with guaranteed retirement income.
Fixed annuities offer: guaranteed minimum rate of return, where investors know exactly how much interest their annuity will earn each year; tax-deferred growth, where investors won’t pay taxes on any of the earned interest until they start to make withdrawals, so their money has the potential to accumulate more quickly than a taxable investment at the same rate; and flexibility of premiums: one type of annuity, a flexible premium annuity, allows investors to alter the amount and the frequency of payments, within specified boundaries defined by the insurer and the law.
A fixed annuity can bring balance to a retirement portfolio that may already hold more aggressive investments such as stocks, or can simply add a degree of stability to one’s overall investment portfolio. Equally important, with a fixed annuity, one can choose to receive income one can’t outlive. Investors either can choose to receive income over their entire lifetime or for a specified number of years.
Fixed annuities may offer many benefits for the conservative investor, including the following:
Guaranteed return of premium payments: Some annuity contracts guarantee that investors will receive no less than the sum of all premiums paid, less any previous withdrawals, if the annuity is surrendered. However, some withdrawals and surrenders may be subject to surrender charges and/or tax penalties.
Access to accumulated value: Many annuity contracts allow investors to withdraw a percentage of the accumulated value each year without incurring surrender charges. With some annuity contracts investors also can access the funds in the annuity without surrender charges in cases of terminal illness or nursing home confinement. And, when investors start taking regular withdrawals in retirement, they can often choose from convenient, tax-advantaged options such as receiving an income for life, receiving the interest only, or taking a set amount on a regular basis.
Benefits to beneficiaries: Proceeds from an annuity can pass directly to one’s beneficiary, bypassing the time-consuming and costly probate process.
Some things in life should come with guarantees. Retirement is one of them. Fixed annuities may help maintain one’s financial independence throughout retirement, regardless of the performance of the stock market.
Some things that are important to note: (1) Guarantees are backed by the financial strength and claims-paying ability of Thrivent Financial for Lutherans. (2) Current interest rates are guaranteed for one full year. In subsequent years, the rate may change as interest rates fluctuate but will never fall below the guaranteed minimum rate listed in the contract. (3) Surrenders or partial surrenders from an annuity are subject to income taxation and surrender charges in the first seven contract years starting at seven percent in the first year and decreasing one percent each year until it becomes zero percent in year eight. Earnings distributed prior to age 59 and a half may be subject to a 10 percent federal penalty tax.
This article was prepared by Thrivent Financial for use by Tri County Area representative John Lauer. He has offices at 3821 Main Street in Morgantown and can also be reached at 610-286-5986.
