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Why An Annuity May Be Key to Your Retirement Plan

From setting aside a portion of your earnings each year to investing for a long-term horizon, saving for retirement is a fairly straightforward concept. Once you reach your retirement date and begin drawing income from your savings, however, things begin to feel more complex and, at times, uncertain.

Annuities can provide longevity insurance by protecting you from outliving your savings. Options include life annuities, providing an income stream throughout your retirement chapter, and joint annuities, giving both you and your spouse payments for the remainder of your lives. The first step is to determine whether an annuity is right for your lifestyle and circumstances.1

Keep in mind that the guarantees of an annuity contract depend on the issuing company’s claims-paying ability. Annuities have contract limitations, fees, and charges, including account and administrative fees, underlying investment management fees, mortality and expense fees, and charges for optional benefits. Most annuities have surrender fees that are usually highest if you take out the money in the initial years of the annuity contract. Withdrawals and income payments are taxed as ordinary income. If a withdrawal is made prior to age 59 ½, a 10% federal income tax penalty may apply (unless an exception applies).

Address Your Retirement Portfolio Needs

Incorporating an annuity into your retirement portfolio can help reduce your likelihood of running out of money. While the benefits of an annuity increase over time, the value exists throughout the lifespan of an annuity.

Annuities can also address the strategic needs in your retirement portfolio. For example, a Qualified Longevity Annuity Contract (QLAC) is purchased inside a qualified retirement account and up to certain limits, and the money used to purchase a QLAC is exempt from your standard Required Minimum Distribution (RMD) requirements.2

Weigh the Pros and Cons

With a variety of annuity options available, it’s important to consider the advantages and disadvantages of each. Generally, the more straightforward the annuity, the less costly it is, but it’s difficult to establish a definitive pros and cons list across the board. This is because it depends largely on the individual purchasing the annuity and the circumstances of their financial picture.

Tax treatment is one advantage of most annuities. Until you begin receiving payments, annuity premiums grow continuously on a tax-deferred basis. On the other hand, annuities have the disadvantage of keeping your principal investment under lock and key for several years. This is the case unless you sell your annuity payments at a discount — an option available if you experience a sudden and urgent need for cash. If you do choose to surrender your policy within the eligible period, you’ll likely be responsible for paying a surrender charge.3,4,5

Choose the Best Annuity for You

At the end of the day, the decision to purchase an annuity is entirely personal as each individual’s financial situation is unique. It is therefore important to clarify your needs and goals as well as evaluate your comfort level with risk before deciding if an annuity is right for you.

Determining how close you are to retiring and understanding the lifestyle changes that come with retirement, including the loss of a steady income, are important factors to keep in mind in preparing for this next chapter. In addition, clarifying if you want a reliable income for life with little risk and low costs will help you determine if a fixed annuity is the best option for you. Alternatively, a variable annuity might be suitable if you’re comfortable assuming risk in exchange for the possibility of higher returns.6

Simplify the Complexity

There’s no doubt that annuities can be complicated, which is why it’s especially important to discuss your needs with a financial professional. This will help you evaluate your retirement portfolio, understand your financial options, and see how an annuity might fit with your goals.

Take the time to understand the details of your annuity contract, including the associated fees and commissions, and don’t hesitate to ask for more than one quote to compare your options. Lastly, take into consideration the reputation of the company you’ll be working with and ensure that they comply with the annuity regulations and are financially sound.

Your retirement chapter can be an exciting and rewarding one. Don’t let the change in your stream of income stop you from experiencing it fully.

1. Annuity.org, February 8, 2022
2. Annuity.org, June 10, 2022
3. Annuity.org, May 23, 2022
4. Annuity.org, April 25, 2022
5. IRS.gov, May 19, 2022
6. Annuity.org, June 9, 2022

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG, LLC, is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright FMG Suite.

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