Understanding the Basics of Annuities
What is an Annuity?
At Hybrid Financial, our goal is to provide you with the information that will guide your retirement decision. What is an annuity? An annuity is a contract between a person (or a married couple) and a life insurance company. Any growth in your annuity can be tax-deferred until you decide to access it. An annuity can help grow and protect your retirement assets, provide assured income and reduce your risk of living beyond your income.
Different types of annuities are available. Each option has certain attributes that may help you achieve your financial goals for retirement.
How Fixed Indexed Annuities Work
A fixed indexed annuity (FIA) is a tax-deferred, long-term income-earning option. An FIA provides principal protection when the market declines. Compared to a variable annuity, it has a higher interest growth potential as well as less risk and potential return.
Returns are based on the performance of an underlying index, such as the S&P 500. It is designed to provide diversification and to reach a wide market segment. The benchmark index may follow the market but your earnings are never directly linked to it. Therefore, your principal is protected from stock market risk with a fixed annuity. This is because n FIA is a product rather than an investment.
Two Stages of Annuities
What is an annuity?
Any annuity contract involves two stages. Each annuity contract is different, but these two steps apply to all FIAs.
An annuity agreement has two main phases: accumulation and distribution. The accumulation phase involves letting your money grow. This phase begins when retirees access and use their funds or when lifetime income begins to be distributed.
Stage 1: Accumulation
The first stage is the accumulation stage or the time when you save and build the value of your retirement funds. Regardless of the market conditions, fixed index annuities will grow with a set interest rate. Further, FIAs possibly provide greater returns when the index rises while protecting your capital when the index falls. This accumulation phase allows your money to grow steadily while you leave it in place.
Stage 2: Distribution
In an annuity contract, the second phase is the distribution phase. This is when you start receiving payments from the annuity to create an income in retirement, Annuitization is converting an annuity into a regular retirement payment. You can schedule withdrawals to receive payments – monthly, quarterly, or annually. There is even the option of receiving a lifetime income. You may be able to withdraw certain payments without penalty from a fixed index annuity.
Annuities and Taxes
As your money accumulates, it grows tax-free. You pay taxes when you withdraw the money. If you want to lower your current tax liability, this is an extremely useful tool.
Interested in learning more about “what is an annuity” and the different types of annuities? Contact us to discuss your specific needs.