Deferred Annuity

Purchasing a Deferred Annuity

You can purchase a Deferred Annuity for as little as $5,000. Then you can add to it every month until you retire. The calculations for payments later in life use your promise, commitment, and obligation to pay a monthly amount.  In addition, the initial investment plus interest, subtracting fees and costs are incorporated in the computation.

Many people who max-out their 401K and IRA contributions, plus maintain access to other cash for emergencies, like to purchase a Deferred Annuity to complement other investments and ensure a guaranteed monthly payment for their retirement years.

Consider these annuities as contracts in which investors deposit funds with an insurance company and elect to defer their income payouts for a certain period of time. Investors deposit payments either as a lump sum or in installments. In return, they receive a guaranteed income stream for a certain term or for life. Unlike immediate annuities in which payouts start right away, deferred annuity payments start later — possibly after 10 or 20 years. Typically, the longer you defer receiving payments, the planned income will grow.  Deferring payment must be well-thought-out and include the health of the annuitant to ensure payments at a later age when distributions will be paid.

Types of Deferred Annuities

Deferred annuities offer several features, including guaranteed payouts, tax-deferred growth, and death benefits (paid out to your beneficiary after your death).

  • Fixed Annuities. These annuities guarantee a fixed interest rate over the accumulation phase after which the rate typically changes. Fixed annuities appear similar to certificates of deposit (CDs) in that you receive guaranteed interest payments. The insurance company sets the accumulation rate with a guaranteed minimum. This could be a 5% rate of return during the first two years and a guaranteed 1% for the life of the contract. After the first two years, the insurance company could increase or reduce the accumulation rate. One notable difference between a CD and a Fixed Annuity is the tax treatment of earned interest. Any interest earned from a CD generally becomes subject to taxes in the year received, whereas interest earned from an annuity can be deferred until you make a withdrawal.
  • Variable Annuities. These annuities allow for premiums to be invested in sub-account funds comparable to mutual funds. Types of sub-accounts can vary between contracts, but like mutual funds, they can contain a mix of stocks and bonds. The returns depend on how these underlying sub-accounts perform. Variable annuities don’t guarantee a minimum return. If the value of the investments declines, so will the contract’s value. Most variable annuities sell with riders, an additional benefit that, for a fee, guarantees lifetime income when the buyer activates the income stream. Some variable annuities link to a stock market index such as the S&P 500 so that the annuity maintains a rate floor and cap, typically 3% and 9%.

Deferred Annuity Features

Generally speaking, deferred annuities include an investment period before a contract holder begins receiving income from the account. However, what if the annuitant has an emergency and requires access to some of the funds during the required investment period? If this occurs and the annuitant decides  to withdraw funds, a surrender or penalty fee may apply.

A deferred annuity allows the deposited funds to grow tax-deferred. In addition, deferred annuities are similar to other retirement accounts.  For instance, if withdrawals occur before the age of 59.5 a withdrawal penalty may be accessed and the withdrawal may be treated as ordinary income.

Risks Associated with Deferred Annuities

  • Inflation: Inflation causes problems for any investment, but planning can easily offset inflation for future years.
  • Liquidity: Penalties usual occur for early withdrawal for an emergency. Our Financial Advisors can negotiate early withdrawal fees and will help get our clients the lowest rates.
  • Fees: Annuities contain complex fee schedules that vary depending on the type of annuity you choose. Variable annuities typically offer features such as a death benefit and future benefit guarantees. These features, referred to as riders, will cost a little extra. Our Financial Advisors will help you negotiate the lowest costs.
  • Tax consequences: Taxes remain deferred until you start taking withdrawals. Deferring taxes until later years creates an advantage for compounding your funds as well as paying less tax upon retirement.

We Can Assist With Your Retirement Needs

In order to plan for income after retirement, one must consider many different financial alternatives.  Why not call us and speak to one of our trusted Financial Advisors who can assist you in building an investment portfolio. Our financial professionals can work with you to design a retirement strategy that makes sense for your situation.