Fixed and Variable Annuities

Fixed annuities can play an important role in your retirement planning. While a pension and Social Security may provide some retirement income, it may not be sufficient for the kind of retirement you want to have. Fixed annuities can help you save for retirement and provide you with additional income over the years ahead.

What Is a Fixed Annuity?

Essentially, a fixed annuity is a CD-type investment issued by an insurance company. You pay into the annuity, either in one lump sum or in payments over time. In exchange, you get a guarantee of receiving payments in the future, either for a specified period or for the duration of your life.

How Can Fixed Annuities Help with Retirement Planning?

Annuities are designed to help you save for your retirement and provide you with income when you retire. They offer several benefits, including:

• Tax-deferred growth potential
• Protection from market downturns, which is helpful in keeping up with rising medical costs and inflation
• Flexible income options
• Joint-life payout for both you and your spouse during retirement
• Death benefit for your beneficiaries (or a cause or charity you believe in)

Fixed annuities can be immediate or deferred. Deferred fixed annuities accumulate interest at a regular rate, while immediate fixed annuities make fixed payments during your retirement, with amounts determined by your age and the value of the annuity. Fees for fixed annuities vary, depending on type and amount, and the costs involved may be difficult for a person to understand without assistance from a professional. If you are considering a fixed annuity to improve the quality of your retirement, our agent at Richmond Insurance and Associates, LLC in Gaffney, South Carolina, can help find the right insurance product for you and your spouse.

Variable Annuities

A variable annuity is a type of annuity contract, the value of which can vary based on the performance of an underlying portfolio of sub accounts. Sub accounts and mutual funds are conceptually identical, but sub accounts don’t have ticker symbols that investors can easily type into a fund tracker for research purposes. Among annuities, variable annuities differ from fixed annuities, which provide a specific and guaranteed return.

KEY TAKEAWAYS

• The value of a variable annuity is based on the performance of an underlying portfolio of sub accounts selected by the annuity owner.
• Fixed annuities, on the other hand, provide a guaranteed return.
• Variable annuities offer the possibility of higher returns and greater income than fixed annuities, but there’s also a risk that the account will fall in value.

Understanding Variable Annuities

There are two elements that contribute to the value of a variable annuity: the principal, which is the amount of money you pay into the annuity, and the returns that your annuity’s underlying investments deliver on that principal over the course of time.

The most popular type of variable annuity is a deferred annuity. Often used for retirement planning purposes, it is meant to provide a regular (monthly, quarterly, annual) income stream, starting at some point in the future. There are also immediate annuities, which begin paying income right away.

You can buy an annuity with either a lump sum or a series of payments, and the account’s value will grow accordingly. In the case of deferred annuities, this is often referred to as the accumulation phase. The second phase is triggered when the annuity owner asks the insurer to start the flow of income, often referred to as the payout phase. Most annuities will not allow you to withdraw additional funds from the account once the payout phase has begun.

Variable annuities should be considered long-term investments, due to the limitations on withdrawals. Typically, they allow one withdrawal each year during the accumulation phase. However, if you take a withdrawal during the contract’s surrender period, which can be as long as 15 years, you’ll generally have to pay a surrender fee.  As with most retirement account options, withdrawals before the age of 59½ will result in a 10% tax penalty