Annuity Planning
There are three main types of retirement plans in the United States: Social Security, employer and government pensions, and individual pensions (i.e.: 401Ks, IRAs, etc.). Typically, 401Ks are selected by the employer, while IRA plans are selected by the individual. The money is deposited into a retirement account each month, and the individual (or a professional investor) selects and invests it in a combination of products in the market, taking responsibility for their own profits and losses based on the market conditions. An annuity, on the other hand, is a contract between an individual and an insurance company where the carrier provides retirement savings vehicle. Relatively speaking, annuities are less risky, regardless of market conditions. After purchasing an annuity, the annuitant can receive a certain amount of income every set period of time (ex:monthly) until his or her death or when the annuitant reaches the age of receipt. If the beneficiary is still healthy after the insured amount is exceeded, then the insurance company may continue to pay the incremental income depending on the payment option previously elected as well as the product.
The advantages of annuities:
- Annuities can be tax-deferred, where the money placed into the account is not taxed until used. The amount deposted may help to decrease the tax bracket of the income tax, so less taxes are paid. However, when teh benefits of the annuity are used, it is subject to income tax; this will usually be of lower tax bracket becasue the total income during retirement is usually lower.
- Unlike a 401K or IRA, there is no cap on deposits in an annuity; and it can be a reasonable amount of deposit(s) based on your needs.
- Money from other retirement accounts can be rolled over into the annuity in a lump sum. Most annuity products will pay dividends in the first year or after, depending on the specific number of years of contributions elected.
- In addition to receiving a lifetime retirement income, the policyholder can designate a beneficiary who can receive the entire principal amount if the annuitant dies before receiving the benefits. If there is an unused balance in the account at the time of the annuitant's death, the beneficiary can also continue to receive it depending on the benefit payout option elected.
In the U.S. family and individual retirement income annuity insurance market, U.S. annuity insurance products, are divided into the following four major categories.
- Fixed Annuity Fixed Income Annuity: The return is determined by the performance of the stock market index. If the underlying stock index rises, then the annuitant receives the return under the contract's return line; if the stock index falls, then he or she receives the contract's guaranteed minimum yield return.
- Variable Annuity: It is an investment type annuity with high risk and high return. The insurance company generally does not guarantee the investment return and the amount paid to the annuitant varies according to the market conditions.
- Indexed Annuity: The income is determined by the performance of the stock market index. If the underlying stock index rises, then the annuity beneficiary receives the return under the contract's return line; if the stock index falls, then the receipt is the minimum yield return guaranteed by the contract.
- Immediate Annuity: The policyholder opens an Immediate Annuity Guarantee Account with the insurance company and deposits a large lump sum of money (which can come from life insurance accounts, RAS, cash deposits, 401Ks, 403(b), other annuity accounts, etc.) and the insurance company then pays the pension on a monthly or annual basis. This is similar to the concept of a "lump sum" that can be taken for life.
