Annuities have gotten a bad rap over the last few decades. Sometimes deserved.
Why?
Well they're great when you need them and not so great when you don't!
What's an Annuity
Well there are different kinds, but the most common kind we work with are Indexed Annuities.
The premium is generally a lump sum of cash that is applied to the annuity. Ultimately this is a premium as annuities are life insurance products.
The cash value will increase according to the performance of the underlying indexed growth strategy and provide a death benefit (not tax free for annuities, but tax burden can be greatly reduced if structured properly).
Generally a person seeking an annuity will use the annuity for lump sum withdrawals or regular income withdrawals in a retirement scenario.
Upon death, the cash balance can be paid in a single payment or spread out up to 5 years. Depending on original fund sourcing, this can be rolled over into an annuity to the beneficiary, or even put into an IRA tax free.
Indexed Growth Strategies - Advantages
Just like IULs, the guarantee is the cash value does not reduce in years when the underlying growth strategy reduces in value due to market conditions such as a recession. This is very significant in a retirement scenario where one requires steady income and doesn't want to withdraw from traditional retirement sources that may have significantly lost value temporarily.
Annuity Timing - Limitations
Annuities are generally not much use in a scenario where one may need to access the cash value of the annuity any less than 7 years after starting.
This is the concept of an Annuitization Period. This period can often be 7, 10, or 15 years.
Obviously the growth of the annuity will be more significant AND more aggressive with a longer annuitization period.
However, if one accesses these funds during this time then there can be significant penalties.
So why mention all this?
Because there is often a golden opportunity between that 7-15 year window before retirement (or Financial Independence as we like to call it) where an annuity can provide a very reliable source of income that is not subject to normal market volatility. However, during one's younger years; an annuity may make less sense than other strategies because one may lack capitol to make an annuity sensible.
Also, an annuity cannot represent more than 50% of one's net worth generally. So a younger person may not have a net worth that makes an annuity sensible.
Wrapping Up
Annuities can be very useful, but only to the right persons. They also need to be designed correctly to suit the individual.
If any of these scenarios for suitability, or unsuitability, describe you; please book a meeting with us so we can help you navigate a solution to your needs.
Comments