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What is an
annuity?
An annuity is a contract between you and an
insurance company. It provides unique retirement planning
benefits. Annuities are purchased to build a nest egg for
retirement at a faster rate than traditional alternatives.
Fixed annuities are GUARANTEED investments, which means your
principle investment is NEVER at risk.
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What
are the advantages of an annuity?
There are three main advantages to
annuities. First, annuities grow tax deferred, which means
you do not pay on the interest every year like CD's. The
interest continues to compound to earn you more money.
Second, annuities may be turned into a lifetime income
stream. The annuity can be "annuitized" providing
annual or even monthly payouts for periods of time. And
lastly, annuities bypass probate. The money goes directly to
your heirs similar to a life insurance policy.
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assets should I look at moving into an annuity?
CD's are good assets to put into
annuities. Like CD's annuities give you guaranteed return
for a certain period of years, often longer than a CD.
However, annuities grow tax deferred unlike CD's. Also,
mutual funds that are performing poorly in the market are good
assets to move into a fixed annuity; protecting your money for
your future retirement years.
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can I see what the real advantages are to tax deferral?
Below is a table comparing a tax deferred
annuity with a CD at a tax rate of 27.5% to be paid annually.
| Tax Deferred
Annuity |
CD (Tax Rate of
27.5%) |
| Year |
Balance |
Interest
Earned |
Value |
Balance |
Interest
Earned |
Value |
Difference |
| 1 |
$100,000 |
$6,000 |
$106,000 |
$100,000 |
$4,360 |
$104,360 |
$1,640 |
| 2 |
$106,000 |
$6,360 |
$112,360 |
$104,360 |
$4,530 |
$108,890 |
$3,470 |
| 3 |
$112,360 |
$6,740 |
$119,100 |
$108,890 |
$4,740 |
$113,630 |
$5,470 |
| 5 |
$126,250 |
$7,580 |
$133,830 |
$118,570 |
$5,160 |
$123,730 |
$10,100 |
| 10 |
$170,000 |
$10,140 |
$180,140 |
$146,700 |
$6,380 |
$153,080 |
$27,060 |
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How
long do I have to keep my money in an annuity?
Terms of contracts vary from 1 year to 20
years. Most annuities have penalty free withdrawal
provisions and some have as much as 60% loan provisions for added
liquidity.
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If
I close an annuity early, do I have to pay penalties?
Yes, there are penalties for early
withdrawals, however, most annuity contracts have penalty free
withdrawals available after year 2 of anywhere from 5-10%.
But remember, if you invest only the money you do not need for
your current bills, you stand to earn a lot more than other forms
of investments.
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What
happens when I die if I have an annuity?
Your annuity value will not be lost when you
pass on. If you have not started to receive a stream of
income from the annuity, the entire value passes on to your
beneficiary. If you have started to take income payments,
then the payments will continue to your beneficiary for the number
of years you selected when you buy the contract.
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How
can I tell if a particular annuity is a good choice for me?
The best way to be certain is to visit with
an experienced professional in the field of fixed investments
including annuities.
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Is
there anything else I should know about annuities?
Yes. The best way to get more answers
is to talk to a professional advisor. Click here
to e-mail me for more information or to contact you to discuss
some options.
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Portions of this
information have been taken from
"Annuities and You" pamphlet from M&O
Marketing.
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