Annuities

A lot of you are worried that the stock market is a bit long in the tooth and that your 457 plan and other investments may suffer some painful losses. After all, the Dow Jones Industrial Average is about three times higher than where it stood six years ago. Conventional wisdom tells us to buy low and sell high, but unfortunately, there’s no way to tell when a market has topped (or bottomed) until many months after the fact. With this in mind, a lot of investors are looking to book profits now and put a part of their investments into something safe. The only problem is money market accounts are paying next to nothing, government bonds are near their an all-time high, and CDs aren’t paying like they used to. Since interest rates are so low, a lot of you have been looking into buying an annuity, but with all the information out there, sifting through all the choices causes a lot of confusion and frustration. So to help you make the best decision based on your unique circumstance, below is some very useful information about annuities: Q: What is an annuity? A: An annuity is a legal contract between you and an insurance company that lasts for a period of time, usually somewhere between 5-10 years. Q: How do annuities work? A: In general, you exchange a lump sum of money or a series of contributions over time (just like regular contributions to your 457 or other retirement plans) for a future payment either as a stream of income or a lump sum. During the term of the annuity, depending on the contract, either you or the insurance company take on the responsibility of investing your money. Q: What Are The Different Types of Annuities? A: In general, there are two types of annuities: Fixed and Variable. Fixed annuities are guaranteed investment contracts issued by insurance companies; it’s to an insurance company what CDs are to banks in that they pay a guaranteed interest rate. These rates are usually higher than what bank CDs pay. Since the timing and amount of the payments from a fixed annuity are predictable, retirees find this type of arrangement ideal when looking to supplement other sources of retirement income. A variable annuity is funded with either a lump sum or payments over a period of time. Any growth in the underlying investments (called sub-accounts) is tax-deferred until you start taking income withdrawals. Available sub-account choices range from conservative to aggressive and depending on the insurance company, you might have fifty or more sub-accounts to choose from. Changes between sub-accounts are usually free of charge, but excessive changes may incur a charge so it’s important to check your contract for how many changes you can make without paying extra. Q: When can you pull money from your annuity? A: Payments can begin almost immediately or at some point down the road. When you contribute a lump sum or build up funds over time, you can convert that amount, or "annuitize" it, into a stream of income which can last for a certain period of time or throughout your lifetime. It just depends on the terms of your contract. Please note: you can get money any time from your annuity, but if you break your contract early, you could get slapped with an early surrender charge. Below are the most common types of periodic annuity payout options: 1. Fixed Amount: This type of payout gives you a fixed monthly payment that continues until the value of your annuity is completely depleted. The main drawback of using the Fixed Amount option is you might outlive the monthly payments. Any balance remaining when you die is paid to your beneficiary. 2. Fixed Period: The Fixed Period option ensures you get a fixed payment over a time period of your choice. For example, you might elect to get annuity payments from age 65 to 85. If you’re looking to supplement your other sources of retirement income, for example, your pension and Social Security, then a Fixed Period annuity is something to strongly consider. Any balance remaining when you die is paid to your beneficiary. 3. Straight Life: If the thought of running out of monthly payments before you die doesn’t sit well with you, then a Straight Life (or Lifetime) payment is a great choice. As the name suggests, this option ensures payment until you die, but nothing is paid to a beneficiary. Of the three options listed so far, the life annuity gives you the highest monthly benefit, but it comes at a potential cost; if you die earlier than expected, the insurance company keeps the balance of your funds. You’ll want to consider a Straight Life annuity when you want to maximize monthly income and if you’re fairly certain your beneficiary will be financially secure after you die (e.g. he or she will get a life insurance payout). 4. Life With Period Certain Since the idea of a Straight Life annuity can be a bit unsettling, a Life With Period Certain payout option offers some peace of mind. Payments will continue for your lifetime but if you die within the period of years spelled out in your contract, the remaining payments are made to your beneficiary. 5. Joint And Survivor This payout option ensures both you and your beneficiary (typically one’s spouse) will get a lifetime payout. Monthly payments are made to you during your lifetime and after you pass away, income continues to your beneficiary. The payment amount to your beneficiary is usually the same or half of what you were being paid but this again depends on the terms of the contract. Q: What are some of the costs I should be aware of? A: This will depend on the type of annuity you own, so it’s important to review the details first. In general, annuities impose a surrender charge if you withdraw funds early. This is understandable since the insurance company is guaranteeing your principal. The insurance company enters into agreements with other parties to make good on their guarantee, so if you withdraw early, doing so could negatively impact those agreements. Some annuities, however let you withdraw a certain percentage during the life of the contract without a surrender charge. This of course will be spelled out in your contract, but always be careful of pulling money from an annuity prior to 59 ½. You’ll have Uncle Sam to deal with, and he is not a forgiving uncle. In addition to early surrender charges, mortality costs are something to be aware of and these usually range from 1%-1.5%. Mortality charges protect the insurance company in case you live too long. Also, be aware of any investment expenses charged by the insurance company. These, and all other costs, are clearly stated in your annuity contract and associated documents. As with any financial decision, especially annuities, be sure you’re clear about what your are taking ownership of and consult with a knowledgeable and competent financial planner. Securities and advisory services offered through Ausdal Financial Partners, Inc. Member FINRA/SIPC 5187 Utica Ridge Road Davenport, IA 52807 563-326-2064 www.ausdal.com. Public Retirement Planners, LLC and Ausdal Financial Partners, Inc. are separately owned and operated.