In the midst of this pandemic-driven recession, many consumers are dusting off their financial planning files and refreshing their knowledge on what they own that could help them get through a market downturn. You may be finding that you own some products you forgot about, such as an annuity.* It’s also possible you’re looking at your portfolio and wondering if there’s something you could have included to offer a greater sense of protection during vulnerable times. Either way, this market downturn presents an opportunity to better understand the income vehicles you do have at your disposal and how to make the most of them, as well as how to plan for the future.
Getting Reacquainted with Your Annuity
If you started going back over the financial products you own and were surprised to find an annuity, you may be wondering how to take advantage of this to meet your short-term needs while still pursuing your long-term retirement goals.
Balancing Protection and Growth
The retirement realities faced by Americans continue to change. Lifespans are longer, a 30-year retirement isn’t unusual, and traditional sources of retirement income – mainly Social Security and pensions – don’t provide the same sense of security that they did in the past.1 In the face of these challenges, annuities can add stability by diversifying your investments and providing steady, reliable income that doesn’t depend on the markets.
For those looking for investment options, annuities can provide flexibility and growth potential:
- Annuities are tax-sheltered investments. This means that when your annuities earn money, the taxes on those earnings are deferred until you make withdrawals. Deferring these taxes allows you to keep more of your money working for you in the market, with the potential to accumulate and compound over time.
- Annuities offer the option for a guaranteed death benefit that would pass on to your beneficiaries, as long as you don’t annuitize your contract. Annuities also offer a unique feature called a step-up. This feature can be added on to lock in investment gains, so that your beneficiaries would receive the stepped-up amount, even in the case of market volatility in the interim. This means that your legacy has the opportunity to continue growing.
- Unlike other tax-deferred retirement accounts, such as IRAs or 401(k)s, there is no annual contribution limit for an annuity. This means you can continue to put money away in them, making annuities particularly useful for those who may be nearing retirement age and are still working to build retirement savings.
When you invested in your annuity, you would have chosen how you wanted your eventual payouts to be calculated. Here are the most common options:
- Income for a guaranteed period (also called period certain annuity): A specific payment amount is guaranteed for a set period of time. If you die before the end of the period, your beneficiary will receive the remainder of the payments for the guaranteed period.
- Lifetime payments: You are guaranteed an income payout during your lifetime, and there is no survivor benefit. The payouts can be fixed or variable, and the amount is determined by how much you invest, as well as your life expectancy.
- Income for life with a guaranteed period certain benefit (also called life with period certain): A combination of a lifetime payment annuity and a period certain annuity. You receive a guaranteed payout for life that includes a period certain phase. If you die during the period certain phase of the account, your beneficiary will continue to receive the payment for the remainder of the period. For example, life with a 10-year-period certain phase is a common arrangement. If you die five years after you begin collecting, the payments continue to your survivor for five more years.
Depending on the payout options you chose for your specific annuity, as well as how and when you choose to withdraw, making withdrawals can come at a cost. While it’s tempting to immediately withdraw from your annuity to find a temporary sense of relief, it’s important to make sure your withdrawal strategy aligns with your long-term financial goals. If you’re revisiting the specific terms of your annuity, make sure to ask your finacial professional about the following:
Surrender charges: If your withdrawals come within the first five to seven years that you own an annuity, you may owe the insurance company a surrender charge.
- If you sell after just one year, the surrender charge can typically be around 7%. Often, the fee then declines one percentage point a year, until it gets to zero after year seven or eight. Check your contract's rules, however, because some annuities have initial surrender charges that can be as high as 20%.
- Some contracts offer an opportunity to withdraw up to 10% of your investment without having to pay the surrender charge. Make sure to ask your financial professional if this opportunity is available to you.
Withdrawal penalty: For most annuities, if you make a withdrawal before you reach age 59 ½, you’ll be required to pay a 10% early withdrawal penalty to Uncle Sam.
If You’re Interested in an Annuity…
If you didn’t re-discover an annuity, but you’re now considering one, your financial professional can partner with you to determine the type of annuity that best fits your long-term financial goals, your comfort with risk, and your vision of your daily life. Maybe you want to secure guaranteed lifetime income. Maybe leaving a legacy for your loved ones means everything to you. Annuities are offered in a range of options, providing you the opportunity to pay for only the features and benefits that are important to you. Optional benefits are available for an extra charge in addition to the ongoing fees and expenses of the variable annuity. Guarantees are backed by the claims paying ability of the issuing insurance company.
We know the more information you have, the better the decisions you can make for yourself. If you want to take some time to revisit your overall retirement strategy before considering an annuity, Jackson’s Retirement Expense & Income Calculator can help you project realistic expenses in your retirement, so that you’re prepared to take control of your future.
1. “Americans Expect to Live Longer. Now They Support Retirement Policies to Help Plan for It,” Barron’s, January 24, 2020.