Fixed Income Annuities—Certainty in Uncertain Times
Guaranteed income brings calm in a chaotic world. Retirement changes everything—at least when it comes to finances. Proper planning brings you peace of mind no matter the chaos of the surrounding world. And nothing brings more certainty than annuities. Annuities protect your retirement from the unknown days ahead because they aren’t tied to the stock market.
Retirement should be a time of excitement and rest, not despair and anxiety. Annuities, specifically fixed income annuities, guarantee a steady stream of income that can’t be lost. You worked hard for your retirement income—now it’s the time to protect it!
How Fixed Income Annuities Work—And Create Certainty
Insurance companies, generally known for selling life insurance, also provide protection for your retirement income in the form of annuities. Fixed annuities exist outside of the markets, unlike variable annuities and mutual funds. They don’t drop when the markets do. They never lose the principal you’ve invested. They’re safe. The rates on annuities are agreed upon by both parties when the annuity contract is signed. You’ll find no surprises here—no matter what surprises show up every day in the newspaper. Annuities rates don’t change as long as it’s a fixed annuity. Annuities mean income in retirement is guaranteed.
What’s a Fixed Income Annuity?
If you haven’t heard of annuities, they’ve been sold by insurance companies for over 100 years. A fixed income annuity is an investment sold by an insurance company. The goal of fixed annuities is to provide lifetime income upon retirement. Many investors purchase fixed annuities because they can provide for life—even if you outlive the initial period of time the insurance company agreed to. A fixed annuity is different from variable rates annuity due to the fact that the interest rate doesn’t change over the life of the annuity. It’s set in stone.
A fixed annuity is an insurance company’s version of a Certificate of Deposit (CDs) that banks sell. The rate annuities grow is agreed upon by both parties and unchangeable. With an annuity, you give an insurance company some of your income, and after the agreed period of time, they return the income to you as fixed income. This repayment can come in the form of fixed monthly income to cover living expenses during retirement. Fixed annuities represent low-risk investments that can often provide income for life. It’s a hard deal to beat.
One attraction of income annuities is that they’re taxed deferred. The investment isn’t taxed until it’s withdrawn by the investor and counted as a source of income. You essentially pay your future self a part of your current income—with extra interest. Lifetime income sounds too good to be true, but it’s what fixed annuities were built to provide.
Two Phases, One Goal—Guaranteed Returns
Accumulation Phase—Tax-Deferred
When income is paid into the annuity, whether lump sum or made in multiple payments, it isn’t taxed. If you’re already maxing your IRA, a fixed annuity can be an additional route to set aside income for later without paying taxes on it. Like most investments, the annuity contract will stipulate that the money cannot be withdrawn from the annuity ahead of schedule without a penalty.
Tax-deferred means that the income that’s put towards an annuity will not have tax paid on it before it enters. The money in income annuities has the ability to ‘hide’ temporarily from taxes. It’s deferred income. Tax-free income reduces your yearly total income to potentially put you in a lower tax bracket while also saving that income for the future. It’s a win-win.
Payout Phase—Yours with Extra
After a fixed amount of time, the annuity is available for collection. Typically, income annuities sold by a life insurance company mature in 3-10 years. A mature annuity can be collected either in a lump sum or in monthly payments, depending on the contract. The payout of an annuity needs to be reported on taxes in the year in which they’re received. This is how it earns the name deferred income annuity—it’s your money paid back to you with extra, depending on the annuity rates.
If a fixed annuity is set up to payout as lifetime income, there are a few caveats. The amount paid out to women is usually 2-4% lower than men. That’s because women, on average, live longer than men and need to be paid over a longer duration.
Your Money, Your Choice —Payment Options
An annuity can payout in a single lump sum, or it can be handed out in small payments for the rest of your life. This second choice is what makes it attractive to many retirees—guaranteed, risk-free retirement income. Fixed annuities are a form of saving totally separate from the stock market which makes them an excellent choice in the volatility of our day and age. The chaos of the stock market shouldn’t be something else to worry about.
Additionally, a fixed annuity can be rolled into another annuity if you don’t desire to withdraw from the fund yet. They’re flexible because it’s your money—not a mutual fund manager’s money. Income annuities can be used to supplement Socia Security and IRA savings as a part of your retirement planning. No matter what you use your annuity for, you’ll have rights reserved for the terms of the agreement and payout. You control the payout schedule and know ahead of time the exact amounts found in each return payment. A life of worry-free finances in retirement!
By the Numbers —What Would a $100,000 Annuity Pay per Month?
Let’s say you want to invest $100,000 in an annuity, aiming at retirement income. You would contact a qualified agent by phone or email and inquire about their services. Good agents will ask questions about your goals to help you purchase an annuity that’s personal and matches your values. Are you looking for a specific return amount each month? Do you want to just watch your money grow free from the stock market? An agent can help you decide which annuity route best fits your circumstances.
For simplicity, let’s say you want a fixed income annuity as discussed. You put in $100,000 and wait ten years. What, realistically, could the monthly amount be? This depends on how long we let the annuity grow. The longer the growth the greater the monthly amount will be.
If the $100,000 is left alone to grow at 4% each year for 10 years before the first withdrawal the monthly amount you can expect to receive runs around $1,200. Not too shabby!
As all investment math shows, the earlier you can start the better! If you’re interested in starting a fixed annuity, call us today. Ask one of our skilled insurers for more information. They can get you the latest quotes based on current tax rates to ensure that you’ll get the best deal. If you’re looking to learn the right way to invest for longevity, one of our agents would love to talk with you. You’ll find what you’re looking for.
There are a few other things to consider when purchasing an annuity. Fixed annuities are merely one form of an annuity. A variety of annuities exist. Each of them comes with pros and cons to consider. A variable-rate annuity might produce higher interest rates, but will also be tied, at least partially, to stock values on the stock exchange. A fixed index annuity is another annuity that ties the return rate to a specific index number. Our agents will be able to talk to you about why you might consider some of the other annuity options.
Fixed Annuity FAQ
1) Are Fixed Income Annuities a Good Investment?
Fixed income annuities take the burden of retirement off of the stock market. The stock market is a wild place these days. Annuities provide a safe place for your accounts to grow outside of market shudders. Fixed annuities can’t lose their principal. No matter what. They free you from worry. All of us could use less worry in our lives, especially when it comes to the future.
Annuities constitute a low-risk form of investment that beats bank Certificate of Deposits (CDs). Fixed annuities aren’t backed by the FDIC like a bank Certificate of Deposit would be, however, insurance companies must operate under state and federal regulations. Be sure to check the security ratings of us or anyone you’re interested in buy an annuity from. The higher the rating, the better.
2) Can you Lose Money on a Fixed Annuity?
No. The principal can’t be lost. This is what makes income annuities worth having. The only way to lose money is by violating the terms of the agreement by withdrawing early. You’ll face surrender charges if you decide to remove your income early from the annuity and you’ll still have to pay income taxes on the money as well. It’s a double whammy designed to keep you from dipping into the money ahead of time. But who wants to dig into their retirement savings unless it’s for an unforeseen emergency?
Guaranteed income means money for the rest of your life. However, if you pass away with money remaining in your annuity, what happens? Fixed annuities can include provisions that will transfer any unpaid amount to a beneficiary upon death. If this protection on your annuity is not taken and you pass away before full payment, the amount remaining will not transfer. Be sure when talking to an agent to include that you desire this protection on your annuity.
3) What are the Fees?
A simple fixed income annuity contains the fewest fees. The fees in a fixed annuity are the lowest because they don’t require management or oversight the way that other investments do. In general, the more complex the annuity, the higher the fees will run. The fees on a fixed annuity run around 2-4%, but be sure to ask an agent if you want more details on what fees are assessed and why.
Annuities-Stable Income for Life
A steady retirement income stream—for life. That’s the promise of an annuity. Income that’s set by a contract an unchangeable. More and more retirees are re-aligning their retirement plans to avoid heavy reliance on the stock market. Market uncertainty makes financial products tied to them riskier than ever. Your retirement account doesn’t get a do-over.
Many find that an annuity is a difficult financial product to understand. How do the payments work? Is it annual? How important to my future should an insurance company be? What annuities are worth it? Today we’re covering what an immediate annuity can help with and why more and more retirees are turning to an immediate fixed annuity to provide guaranteed income for life. Thankfully, information on annuity rates and specific terms in contracts are easier to compare than ever before.
Fixed Annuity—A Retirement Friend
Retirement income is the last place you want to face uncertainty. Your ability to acquire an income stream won’t come back. If you’ve hit retirement and are looking for where to find income for life, a fixed annuity is a great idea. Fixed annuities represent the best option of growth and certainty in retirement investing. Annuities make a great partner to other sources of income like a pension, Social Security, and mutual funds. They’re a low-risk investment that provides guaranteed income.
Insurance companies sell annuities in a manner similar to how a bank sells a CD. The insurance company agrees to hold and grow the lump sum provided by its customer. After a set period of time, the customer gets paid. An annuity creates guaranteed income by growing over a period of time and then paying out either as a lump sum or becoming a steady stream of income returning to you in monthly amounts.
Immediate Income
The best use of an annuity is to let the amount grow over a set period of time, typically 3 to 10 years. If allowed to fully mature, the growth is added to the amount paid later. However, let’s say you’ve already hit retirement and have a lump sum you want to turn it into monthly fixed income today. What does that look like?
In essence, you want a portion of your savings paid back to you in monthly amounts to support you in retirement for the rest of your life. This is where a single premium immediate income annuity comes in. An immediate annuity will exchange the cash given to the insurance company into a deferred payment that can start immediately but last for life. The money’s available for monthly payments starting today and this type of annuity can be right for those who search for a service to provide additional income or will not have a pension.
FAQ
1. How Much Does a $100,000 Immediate Annuity Pay Monthly?
The amount paid by a $100,000 immediate annuity depends on how long it will be paid for and the age of the recipient. The older the recipient, the higher the monthly amount. Additionally, if the annuity is designed to pay out the remaining funds left in the account upon the death of the recipient to living beneficiaries, this will lower the quotes of the amount paid monthly. The amount also changes depending on if the annuity is paid to an individual or issued to an individual plus a spouse.
The good news is that the term on the annuity you purchase will be subject to the rate agreed upon by you and the insurance company. Nothing will be hidden or a surprise because the payout is not touched by market volatility. As an example, a man could expect to receive $525 a month guaranteed for life on a $100,000 immediate annuity. The amount lowers to $490 a month for a woman.
2. How do Immediate Fixed Income Annuities Work?
An annuity is an agreement between you and an insurance company. It can be purchased with pre-tax or post-tax income. The company agrees to pay you back the invested amount plus interest, usually in monthly payments.
This regular income makes it attractive for retirees or individuals about to retire and helps turn savings into lifelong income to live off of. An immediate annuity means that the annuity isn’t given time to grow. There’s no accumulation phase—only a payout phase. There’s less growth on the money before you begin the withdrawal phase. Annuities can’t lose their principal which is why they’re sought as an investment strategy. They’re a safe bet.
3. Are Immediate Annuities a Good Deal?
Immediate annuities take the guesswork out of retirement by providing regular monthly income. Immediate annuities are great for individuals with no pension or immediate income on retirement. Annuities provide certainty. Certainty that few other investment strategies can offer. Immediate annuities require an insurance company you can trust. Be sure to check the annuity companies rating to learn about the quality of the company you’ll be investing with. It’s a good idea, no matter what, to diversify your assets and use the income from an annuity as an additional source of income in retirement rather than the only one.
4. How Much Would an Immediate Annuity Pay?
An immediate annuity from insurance companies pays less than variable or fixed index annuities because it hasn’t been given time to grow. The longer money can grow in any investment strategy, the better. Immediate annuities aren’t given the opportunity to grow before being withdrawn.
Immediate annuity payouts are based on several factors including the age of the receiver—the older, the higher the monthly payout. A five-year difference in age creates less than a 10% difference in monthly payout. An immediate annuity is one of the weaker forms of an annuity, financially speaking, but those wishing to turn savings into a set monthly income find their guarantees worth the trade-off.
Retirement—Freedom and Opportunity.
Retirement is as inevitable as it is enjoyable—for those who’ve prepared properly. It offers real freedom and opportunity. Preparing for retirement means you need to compare rates to search for the best value. Advisors can help, but a guarantee on your investment can be hard to find. When approaching retirement you’ll want to look at a range of investment services you can access. Particularly, an income stream that can last for life.
Investments are available in all manner of new products. Life after retiring requires income. Retirement income takes planning. Even with a skilled advisor, the actual return may be far different. Annuities offer lifetime income. If you’re looking for more information, you’ve come to the right place.
Fixed Annuities—A Safe Investment in Uncertain Times
What’s the most guaranteed way to turn your current income into retirement money? Lock it in the bank? Put it towards a bank’s CDs (Certificate of Deposit)? Mutual Funds? What if there’s a way to ensure that retirement income comes guaranteed—no if, ands, or buts.
No matter where you look there will be risk. These days risk in the markets is reaching a fever pitch. Can you trust your retirement to the stock market? Fixed annuities create income for life—guaranteed. Annuities used to be considered a weaker form of investment but with the stock markets growing more volatile by the year, it’s harder and harder to trust that money put in the market will be there when you want to pull it out for retiring. These income annuities mean a steady for of payment for the rest of your life.
The Right Balance of Risk and Reward—Guaranteed
Annuities represent the right balance of risk and growth. The absolute safest option would be ‘no-growth.’ That is, the income you receive monthly comes from your savings account. The growth of a typical savings account is 0.06% APY. That’s a specific amount of nothing. To a bank, the reward you get for giving them your money is just a gesture on paper, nothing more. Sure, it’s guaranteed, but the average interest rate on an annuity is 4.5-5%. That’s an interest rate almost 100 times higher! Income annuities are the way to go.
Annuity income is guaranteed income for the rest of your life. You don’t get a do-over when it comes to retiring. It’s a one-time event. If you’re not prepared, you’ll have to live with the consequences. An annuity protects you when you retiring by providing guaranteed income pulled from an investment growing 4-5% annually. Not too shabby.
Retirement Security—Guaranteed
When looking for an income annuity, you’ll discover the invested money goes to an insurance company and not a bank. Why would you want to give money to an insurance company and not a bank? Think about it. You trust insurance companies all the time. You trust them with your car, home, health, and you even trust them to pay your beneficiaries after you pass away. You already trust insurance companies to take care of most of what you own. Whether you think about it this way, you already trust insurance companies with a lot.
Insurance companies study risk and rewards every day. It’s the bread and butter of any insurer. They’re the king of calculating risk. Fixed annuities are just another form of risk protection. In this case, it’s income protection. Income annuities are a form of income insurance, in a manner of speaking. But because the returns are guaranteed and fit a formula, the calculations are easy to compute. There’s no hidden math magic. There’s no volatile stock market. It’s a retirement investment that provides a lifelong income stream.
Annuities—Guaranteed Income for Life
An annuity is a contract between you and an insurance company. The insurance company agrees to pay you a set amount starting at a certain age. Your part of the deal is giving them a set sum of money at once or paying regularly for a set number of years. That’s how income annuities work. A partnership between insurer and customer that results in guaranteed income for life.
Annuities come in several forms. Income annuities include the following types of annuities—fixed index, variable, and immediate. They all derive from the basic description above but differ in how they accrue wealth and when the disperse it. All of the various income annuities can provide lifetime income. Variable annuities can provide the highest potential rate of return, but they rely in part on stocks. Immediate annuities have the lowest amount of growth, but that’s because they’re a form of an immediate payout. The money in an immediate annuity isn’t given time to grow. It is essentially savings turned into income payments.
The Hidden Advantage of Annuities—Tax Benefits
Many use annuities because of the tax benefits they provide. Money put into an annuity can be pre-taxed or post-taxed income. Income that is pre-taxed will not count that year toward the total amount of income reported on tax returns. Because of this, it is possible to lower the amount of income you report far enough to be placed in a lower tax bracket. A lower tax bracket means a lower tax rate which means paying less in taxes. It’s a feature that income annuities provide that can potentially shelter some of your income.
When the annuity comes of age after a period of time and becomes annuity income, you’ll have to include any pre-taxed income as an actual income for that year. However, since the amounts earned will be retirement amounts and lower, the income will again be lower than what it would have been if it had been taxed during the initial year it had been earned. It’s a simple way to protect income by making it tax-deferred. Tax-deferred income makes the largest difference for those with the largest incomes, but you might be surprised that this hidden benefit might allow you to keep more of your income overall. It’s worth checking to see if an annuity provides you a hidden tax benefit.
Annuity FAQ
1. What’s an Annuity?
An annuity is a contract between you and an insurance company. At the time designated by the contract, the annuity will pay, either a lump sum or monthly amounts. This can generate supplemental, tax-deferred income for retirees. Annuities are a form of risk-free investment that more and more retirees look towards as the markets maintain unusual volatility.
Annuities are simple. The payouts are agreed on far in advance. There’s no guesswork. No question marks to put in a budget. They’re guaranteed income. An income annuity can be a game-changer.
2. How does an Annuity Work?
An annuity works in two phases. The accrument phase and the payout phase. In the first phase, the money grows either by being paid as a single sum and growing through interest or by being paid into regularly. The annuity usually sits 3 to 10 years to grow. An immediate annuity does not include this phase. This accruement phase occurs before retirement and in preparation for turning the amount of income annuitized into regular income post-retirement.
The second phase of the income annuity is the payout phase. At a set time, usually a set age, the annuity issues its payout. The payout can be a single amount or monthly payments. Either way, the manner of the payout has been agreed upon long in advance. Because it is a contract and the money does not reach the stock market, the returns are guaranteed and can be calculated exactly in advance. Annuities can provide guaranteed lifetime income. An income annuity becomes a life insurance policy why you’re still alive by providing a financial future for life. The guarantees of an annuity are unmatched and why many retirees turn to annuities for meeting their retirement needs.
3. What is the Monthly Payout for a $100,000 Annuity?
An annuity of $100,000 will payout monthly depending on several factors. The age and gender of the receiver matter. A woman is paid less monthly than a man because women have generally longer lifespans and the amount will need to stretch further to cover her long lifespan. Also, if the payouts go towards a person and their spouse this will affect the amount received each month.
On top of these factors, the contract will stipulate who becomes the beneficiaries of the remaining amount upon the death of the annuity holder. If the remaining amount of the annuity is to be paid out to a family member, this reduces the amount paid monthy—by a small amount. How long the annuity is allowed to grow for will be another factor in deciding the final monthly amount available.
Putting it together in the simplest form, a man can expect about $670 a month from a $100,000 annuity that has matured. This amount represents the highest possible amount given. If the person were to die none of the remaining amounts of the annuity would pass on.
The monthly payout of annuities is worth considering because of how protected they are. Because there’s no stock market involved, annuities calculation is easy. It’s a set amount of income paid over a set period of time. It’s essentially deferred income and is treated that way for tax purposes.
4. Can you Lose your Money in an Annuity?
No. This is why annuities exist and why they are used as guaranteed income. An annuity cannot lose it’s principal because it’s not in the stock market or other volatile investment opportunities. Annuities are like a CD in a bank because the money isn’t touched or moved after it’s been invested. It sits and grows on a known percentage.
The only way to lose money in an annuity is to withdraw money earlier than the contractually agreed time. If the annuity contract is meant to sit for 10 years and then ‘annuitize’ and begin being withdrawn from, you will have to take a penalty if you take out money earlier. The amount of the surrender penalty will be public and included in the policy from the date the contract is signed. This restriction imposed on annuities is the only downside of the agreement. You’re agreeing not to touch the money for many years. In return, you get the money paid back to you with interest. It’s a win-win.
What annuities lack in flexibility—though the terms have been agreed to by both parties—they make up for in certainty. A certain 5% interest rate is worth a 10-year wait. It’s worth noting that IRAs can contribute to an annuity and many decide to invest some amount of their IRAs into an annuity to receive the benefits of guaranteed income.
5. What’s the Catch?
There’s no catch! You agree to the terms of the contract and, starting at the appointed age, you’ll begin receiving payments either monthly or on an annual basis. Many retirees purchase annuities because the benefit is life long. Many companies who sell life insurance also sell annuities, which, in a way, are insurance for life by providing lifelong income.
