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Using Annuities to Plan for Your Future

Using Annuities to Plan for Your Future

As the baby boomer generation begins to enter retirement, the various income guarantees and other living benefits offered through annuities may be of growing importance. Before considering an annuity, take some time to understand the product in a general sense and to sort through its costs and optional features.

What Are Annuities?

An annuity is a long-term contract between a purchaser and an insurance company that is designed specifically for retirement purposes. The purchaser makes a single contribution or a series of contributions spread out over a period of time. The insurer is then obligated to make periodic payments to the purchaser starting at a future date, typically during retirement. Annuities are used mainly to supplement more traditional sources of retirement income, such as Social Security and pension plans.

Until the 1970s, most annuities were sold through insurance companies and offered only a fixed amount to be paid out. Annuities today may be sold through insurance agents, financial advisors, bank representatives, and even online sources. Today’s annuities may also be more flexible as many offer — often for an additional fee — optional principal protection features called living benefits.

Common features include:

  • Tax-deferred growth. You will pay no income taxes on the earnings from your annuity investments until you begin making withdrawals or receiving periodic payments. Note that withdrawals prior to age 59½ may be subject to an additional 10% tax.1
  • Unlimited contributions. Generally speaking, there is no limit to the amount of after-tax money you can put into an annuity, regardless of your income level or sources of income.
  • Choice of investment options. Fixed annuities offer a stated rate of return for a specified period of time. Variable annuities include a variety of investment options, such as stocks, bonds, and money market instruments, that fluctuate with market conditions.2,3
  • No mandatory withdrawals. If your annuity is not part of an individual retirement account (IRA) or a qualified retirement plan, you are not required to begin taking minimum distributions after age 70½.4,5
  • Death benefit. Payout methods, in general, include insurance features that guarantee payment to your designated beneficiaries if you die before withdrawals begin. In most cases, this payment does not have to pass through probate.
  • Lifetime income benefits. Typically, you will have several options for receiving annuity payments for the rest of your life, including the choice of continuing payments to beneficiaries for a set period of time.

By offering growth potential that may be tax deferred, any investment earnings in the annuity could accumulate and compound untouched by taxes until you begin making withdrawals, which is usually after retirement. Keep in mind that withdrawals made from an annuity before age 59½ would be taxed as ordinary income and may be subject to a 10% additional federal tax. In addition, the issuing insurance company may impose surrender charges for withdrawals taken during the initial years of the contract.

Living Benefit Options — Driving Today’s Annuity Market

Although the distinguishing characteristic of an annuity is a stream of income that cannot be outlived, most annuities offer optional principal protection benefits for an additional fee. Referred to collectively as living benefits, they offer exposure to the market’s upside while protecting against the effects of market declines on your account value or future income.6

Many insurance companies offer to step up the benefit amount by either a preset percentage or the contract’s value on certain dates. For example, a benefit may be based on the highest value on any contract anniversary. Or, it could be determined by taking your purchase payments (less prior withdrawals) compounded annually at 3%.

  • Guaranteed lifetime withdrawal benefit (GLWB). This benefit guarantees a return of your purchase payments (less prior withdrawals) through annual withdrawals for a specified period or for life, even if the contract value declines to zero.
  • Guaranteed minimum income benefit (GMIB). This benefit guarantees a minimum future income level regardless of how the market performs.
  • Guaranteed minimum accumulation benefit (GMAB). This benefit guarantees a minimum future account balance regardless of investment performance.

Balance Costs and Benefits

An annuity may be an appropriate retirement vehicle if you are able to forgo use of the money for several years. Yet, keep in mind that owning an annuity may entail higher fees and expenses than some other investment vehicles.

Fees charged for annuities include the additional expenses of insuring the death benefit, living benefits, and other guarantees. This is on top of the expense ratios of any underlying investment funds. Also look at annual contract charges and surrender charges the issuing insurance company may impose on withdrawals taken during the initial years of the contract.

Before committing to an annuity contract, investigate fully the insurance company’s stability and financial strength through an independent agency such as Moody’s, Standard & Poor’s, or A.M. Best Company. Also, please refer to your contract’s prospectus for detailed information about how withdrawals can affect your annuity’s death benefit and/or your living benefit.

Annuities can offer tax-deferred growth, potential lifetime retirement income benefits, and a choice of investment options. However, as annuities are complex contracts, understanding what they have to offer in a general sense is essential before integrating them into your financial plan. Consider consulting a financial professional to discuss your personal circumstances.

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Withdrawals will be taxed at then-current income tax rates.


Variable annuity contract values will fluctuate and are subject to market risk, including the possible loss of principal. Diversification does not ensure against loss.


Investing in stocks involves risk, including loss of principal. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and are subject to availability and change in price. An investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although a money market fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the fund.


This applies to nonqualified annuities only. Qualified annuities (i.e., rollovers) must adhere to required minimum distribution rules.


Investors do not receive any additional tax benefit by placing qualified retirement plan assets into an annuity, since tax deferral is already provided by the qualified plan. However, an annuity may still be an attractive option if other features such as guaranteed riders and death benefits are important to the investor.


All living benefits are available for an additional cost. The guarantees associated with living benefits are backed by the claims-paying ability of the issuing insurance company. It is important to weigh the costs against the benefits when adding such options to an annuity contract.

Variable annuities are long-term, tax-deferred investment vehicles designed for retirement purposes and contain both an investment and insurance component. They are sold only by prospectus. Guarantees are based on the claims-paying ability of the issuer and do not apply to a variable annuity’s separate account or its underlying investments. The investment returns and principal value of the available subaccount portfolios will fluctuate so that the value of an investor’s unit, when redeemed, may be worth more or less than their original value. Withdrawals made prior to age 59½ may be subject to a 10% additional tax. Surrender charges may apply. Gains from tax-deferred investments are taxable as ordinary income upon withdrawal.

Not FDIC/NCUA Insured — May Lose Value — Not Bank/CU Guaranteed — Not a Deposit — Not Insured by Any Federal Agency

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