All Annuities are NOT created equal!! — Learn About Annuity Types
There are 4 basic types of Annuities. This site is primarily concerned with the annuity types that can;
- Be utilized to anchor a retirement by providing stable income to supplement social security without market risk.
- Provide income that would otherwise be taken from an investment portfolio so that investments can be left to grow for discretionary use or for heirs, philanthropic goals, or other such needs like education of grand-kids.
This site is not interested in high fee annuities that are marketed as stock market substitutes such as variable annuities. The reality is that in many cases the fees on variable annuities and variable type products can be so high they offset whatever protections they may afford.
Regardless, here are the basis annuity types:
1. Fixed Annuities – Unlike variable annuities, a fixed annuity has no component tied to the stock market. Instead, it’s a relatively simple annuity that behaves a bit like a CD or low interest rate bond, minus any market risk. In essence, you make a payment to the fixed annuity provider and in return, based on your age and the size of the payment, you receive a guaranteed income for life which you may start immediately or defer. Once you begin taking the income, it never changes.
- Who benefits from Fixed Annuities?
- Those who want a predictable, fixed income to supplement other sources of retirement income.
- Those who have a real fear of running out of money in retirement and need to make sure they have at least some money coming in no matter what.
- Those who need to convert assets to income in the near term.
2. Fixed Index Annuities (“FIA”) – these are a sort of hybrid between a fixed annuity and a variable which can feature the best traits of both. Like a fixed annuity they generally have low fees and guarantees on income and crediting (which is how the income base in the annuity grows), and like variable annuities they have a relationship with the stock market. However, this investment is indirect and the investment risk is taken on by the insurance company, not by you or your annuity. The right fixed index annuity may be one of the best possible solutions in the fixed income world for many retirees.
Like a fixed annuity, an FIA guarantees a base income throughout your life. Unlike a fixed annuity, the market component of the FIA makes it possible for your income to grow over your lifetime rather than being stuck as a specific level forever.
An added benefit – most FIA’s feature income that can only go up – so if it increases in any given year, that year’s income is your new base income forever after.
Fixed Index Annuities solve a lot of problems – they generate income that may be capable of keeping up with inflation, income can “step up” but not “step down”, and they do so without risking your principle in the stock or bond markets.
Over time, the payouts from a Fixed Index Annuity can far exceed the initial cost of purchase.
- Who benefits from Fixed Index Annuities?
- Investors who are not comfortable with the current risks in bonds but who need to have a stable fixed income component to their portfolios now or in the future.
- Investors that need a fixed income component in their retirement portfolio capable of keeping up with inflation that is not subject to stock market loss.
- Investors who are not able to tolerate the volatility of stock market investments at all, but still need growing income.
- Investors who are looking for a growing income stream in order to allow their stock market investments to compound for longer time periods due to future discretionary spending goals, legacy goals, charitable giving or other priorities.
3. Variable Annuities – great money makers for financial sales people, not so good for the purchasers. In a variable annuity, you buy the annuity and choose from a number of investments, typically mutual funds, many of which also carry pretty heavy fees. Advantage of a variable annuity:
- Tax deferred growth
That advantage can be outweighed by the amazing fee level most of these things have, particularly given other tax efficient alternatives like Flat Fee Variable Annuities.
4. Flat Fee Variable Annuities — these are the best solution offered in the variable universe and in point of fact are only available at 4 or 5 companies. Like a regular variable annuity, they give you the ability to defer taxes on stock market investments. Unlike a variable annuity, they are not stacked with damaging fees. Flat Fee Variable Annuities can cost as little as $250 a year in fees to the provider, vastly less expensive than a standard variable annuity. Make no mistake – the mutual funds and ETF’s you can invest in have management fees, but typically these structures don’t include sales loads, admin fees, and the other things regular variable annuities sneak in.
- Who does a Flat Fee Variable Annuity Fit?
- Wealthy individuals, trusts or families that want to invest significant monies in the stock market on a tax deferred basis for extended time horizons.
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