Annuities can shine in volatile & unpredictable market environments.

Wide market swings, in the financial markets, can be unnerving when approaching retirement. To help offset the unpredictable, some Financial Advisors offer a flexible strategy of allocating 35% of a portfolio to Fixed Annuities.

During retirement when the financial markets are:

• rising income can be taken from your Equites and

• declining the Fixed Annuities can provide income, while your Equities have time to recover.

Which Annuity building blocks can strengthen your Financial Planning?

• Guaranteed Income Annuity

• Fixed Indexed Annuity

• Qualified Longevity Annuity Contract (QLAC)

What is an Annuity?

It’s an insurance contract between you and an Insurance Company designed to provide consumers with income payments for life or for a set amount of years.

What are the components of each payment the Annuitant will receive:

• Returns of premium (each payment includes a return of premium paid)

• Interest (interest earned from the Insurance co.’s investments of premiums)

• Mortality credits (income that is directly linked to the current age of the Annuitant)

One of the main tax advantages of owning Annuities is that they allow the investments to grow tax-free until the funds are withdrawn. Your investment will grow without being reduced by tax payments.

There are different types of Annuity products, some more sensitive to the financial markets and may take on additional financial risk. You will discover that each Insurance Company while having similar products may have different names for the products.

What are Guaranteed Income Annuities?

Guaranteed Income Annuities are a broad group of Annuities that have fixed income payments that are not subject to the markets ups and downs; they will be backed by an Insurance Company that you pick.  

Investment earnings from Guaranteed Income Annuities are tax-deferred until they are withdrawn.

What are Fixed Indexed Annuities?

Fixed Indexed Annuities provide principal protection of your Annuity in a down market and opportunity for growth. Your Annuity returns are based on the benchmark performance of an underlying index, such as the S&P 500 or Composite Stock Price Index. Your Annuity is never directly invested in the stock market.

Upside potential with downside protection with a Fixed Indexed Annuity

• Original principal will not decline if the index performs negatively (subject to issuing Insurance Company’s financial strength).

• The returns will consist of a combination of a: guaranteed minimum interest rate and an interest rate linked to a specific market index.

• The rate of return, for the linked portion to a specific market index, won’t fully match the rate of return of the index because each Annuity plan will have contractual limitations in the form of: participation rates, gaines caps and interest rates.

• Your losses are generally limited with an Indexed Annuity. For example: If the S&P 500 loses 1% for the year and your guaranteed minimum rate is 2%, you will still earn 2%.

• After each term your earnings are credited to your account; this locks in your earnings. Any future downturns in the Index cannot affect your locked in earnings.
  

What is a Qualified Longevity Annuity Contract (QLAC)?

• A QLAC is a form of a Deferred Fixed Annuity.

• A QLAC is funded with pretax retirement accounts such as traditional IRAs or 401(k) plans.

• Contributions to a QLAC were increased through The SECURE 2.0 Act of 2022 which expanded the original SECURE Act of 2019 (Setting Every Community Up for Retirement Enhancement).
  
  The SECURE 2.0 Act was included as part of the Consolidated Appropriations Act, 2023 which was passed by Congress on December 23, 2022 and signed into law by the president on Dec 29, 2022.

  Originally contributions to a QLAC were limited to the lesser of $135K or 25% of your qualified account balance for life. SECURE 2.0 eliminates the 25% cap and boosts the maximum contribution amount allowed in a QLAC to $200,000.

• You can delay a portion of your RMD (required minimum distributions) up to the maximum age of 85.

• The QLAC Annuity contract will provide you with a guaranteed stream of income for life.

• The longer you wait to start receiving income, the larger your payments will be.

DISCLOSUER: Below are comparisons between different features that you can design your Annuities around. Each state may have their own parameters and each Insurance Company may customize products with their own features. I do not provide tax advice. Contact your tax, legal or accounting professional regarding your individual situation.

With Annuities, you can design your plan:

Premium Options:

• Single Premium: is funded with one premium payment

• Series of Premiums: are funded with a series of payments

Qualified or Non-Qualified Funds:

• Qualified: works with retirement assets such as: 401(k), 403(b) or 457

  Premiums paid into this type of Annuity are not included as taxable income.
  The full Annuity payout is then taxed as ordinary income.

• Non-qualified: is purchased with assets outside of tax-favored retirement plans

  The premiums have already been taxed, so only the growth portion of your Annuity
  payout is subject to taxation and will be taxed as ordinary income.

Income Payment Start Dates:

• Deferred: payments may be deferred minimum 2 years to a maximum 40 years

• Immediate: payments are to begin one year or less of premium payment

Income Payout Options:

• Life with Period Certain: payments are made for a duration of a certain period of time
  
  Annuity payments must be disbursed for at least the duration of the certain period.

• Life with Cash Refund: payments are made for the life of the Annuitant
  
  Upon their death their beneficiary will receive their difference between the premium paid and the total payments made to the Annuitant in cash.

• Life with Installment Refund: payments are made for the life of the Annuitant
  
  Upon their death if the cumulative income received up to that point is less than the premium paid the beneficiaries will continue to receive income payments until the total income paid is equal to the premium paid.

• Life Only: payment options only provide income payments during the lifetime of the Annuitant
  
  There is no death benefit for a beneficiary.

3 practical ways to work with Annuities

Joint Guaranteed Income Annuity

Annuity income can also cover a love one such as a spouse or grandchild.

For example:
You purchase with non-qualified funds, a Joint Guaranteed Income Annuity with the Life only payout option.

Your grandchild is added to your policy as a “Joint Annuitant”. The Insurance Company will pay you an income for life and upon your death your grandchild will then receive an income for their life. *1

Create an Annuity Ladder

You invest in multiple annuities with different maturity dates. This would create a “ladder” of income streams during retirement.

For example:
Your are age 60 and have $100K to create a Future Income Stream. You would like to start receiving annual payments starting at age 70 that lasts for the rest of your life.

Starting at age 60 you determine:

• which years you will invest in an Guaranteed Income Annuity

• the dollar amount to invest with each Annuity and

• how long to defer the income for each Annuity
  
  You have created your own guaranteed income stream of Income.

Satisfying a portion of yearly RMDs with a QLAC

A RMD is the “required minimum distribution” of money that must be withdrawn, on a yearly basis, from your qualified retirement plans once reaching age 72. If you have more than one qualified retirement account you must calculate the RMD for each account separately each year.

You can aggregate your total RMD amounts, for all your qualified retirement accounts, and withdraw your yearly RMD from one qualified retirement account if you choose.

Creating a QLAC would provide recurring distributions that:

• are guaranteed and predetermined payments, allowing you to plan which qualified funds to liquidate for the balance of your RMDs each year

• may allow you not to liquidate funds, for your yearly RMD, from a retirement fund that does not perform well in a particular year

Finally a Financial Product that is meant to invest in when you are older!

How do you see Annuities impacting your Financial Planning?

Let’s Explore Your Insurance Options

Footnotes:

*1 There may be gift, estate and generation skipping transfer (GST) tax consequences for the grandparent/grandchild Joint Life Option.