Is An Annuity Appropriate for You?

Published on June 15, 2023 | LPL Financial

Having enough retirement income is concerning for some Americans. Although consistent contributions into their retirement savings plans have occurred, many are concerned if their retirement plan will be successful. A successful retirement plan provides the ability to maintain your lifestyle for the duration of your life and includes strategies such as:

• Safety– Assets that are protected.
• Income– Payments for life.
• Growth– Return on assets over time.

Having enough retirement income for what you need and want must be planned for, even in the best economic conditions. There is a way to provide safety and income by using annuities as an asset class in your retirement portfolio.

What are annuities?

Annuities help retirees address a significant retirement planning risk- longevity risk. Longevity risk is the risk that a retiree outlives their financial assets. Including annuities in a retirement portfolio addresses the benefit of providing income for life:

• Annuities can act as a substitute for the key benefit of a pension, which is income for life.
• Annuities are used as an asset class in portfolios due to their safety and growth potential.
• Annuities are contractual agreements with an insurance company.
• Annuities offer tax-deferred growth of earnings, protection of principal, and a guaranteed lifetime income.

What are the three types of annuities?

The three types of annuities used in retirement planning are fixed, fixed-indexed, and variable annuities. Like any financial product, there are pros and cons to each type of annuity, and investors should determine which is appropriate to their situation:

1. Fixed Annuities– Provides growth opportunities with income for life and offers principal protection.

• Principal protection- original principal plus all credited interest is guaranteed.
• Growth- a fixed rate for a declared period.
• Tax-Deferral- a benefit for non-qualified assets, not applicable to IRA, 401(k), TSP, etc.
• Provides a lifetime income

Differentiators: Investors should work with their financial professional to consider the rate, term, ratings, and service levels of the issuing company.

2. Fixed-Indexed Annuities– Provides growth opportunities with income for life and offers principal protection.

• Principal protection- original principal plus all credited interest is guaranteed.
• Growth- credited interest tied to index performance
• Some products offer uncapped strategies.
• Tax-Deferral- a benefit for non-qualified assets, not applicable to IRA, 401(k), TSP, etc.
• Provides guaranteed income for life.
• Inflation hedge- growth is designed to increase when prices are appreciating.

Differentiators: Index, participation rates, and service levels of the issuing company.

3. Variable Annuities– Enhanced, tax-deferred growth opportunities, but with the risk of principal loss.

• Potential for more significant growth.
• Provides a guaranteed income for life.
• No principal protection.
• Market-type returns are based on the asset class in the portfolio.
• Invests in Mutual Funds (i.e., Sub-Accounts).
• Tax-deferral benefit for non-qualified investments, not applicable to IRAs, 401(k), TSP, etc.
• Limited investment choices in comparison to Mutual Funds

Variable annuities may be expensive and come with many fees, which decreases the accumulation value. Variable annuities are market sensitive and may incur a loss to the investor. Many times, investors may misunderstand this complex product.

Is an annuity appropriate for you, and which type is best for your situation?

Your financial professional can help determine if an annuity is right for you once you understand each type of annuity and how each can help protect your retirement plan.

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.

Fixed and Variable annuities are suitable for long-term investing, such as retirement investing.  Gains from tax-deferred investments are taxable as ordinary income upon withdrawal. Guarantees are based on the claims paying ability of the issuing company. Withdrawals made prior to age 59 ½ are subject to a 10% IRS penalty tax and surrender charges may apply.  Variable annuities are subject to market risk and may lose value.

Fixed Indexed Annuities (FIA) are not suitable for all investors. FIAs permit investors to participate in only a stated percentage of an increase in an index (participation rate) and may impose a maximum annual account value percentage increase. FIAs typically do not allow for participation in dividends accumulated on the securities represented by the index. Annuities are long-term, tax-deferred investment vehicles designed for retirement purposes. Withdrawals prior to 59 ½ may result in an IRS penalty, and surrender charges may apply. Guarantees are based on the claims-paying ability of the issuing insurance company.

All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.

This article was prepared by Fresh Finance.

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