For annuity awareness month, we wanted to help educate you on the role annuities play in a secure retirement savings plan. Annuities are an investment product that can offer a guaranteed stream of income for a retiree. They are often funded years prior to retirement by either a lump sum or a series of regular payments and can be a great vehicle for those that need additional income in retirement.

Let’s start with asking some common questions about annuities.

What the benefits of an annuity to pre-retirees?

Annuities can provide guaranteed income and guaranteed withdrawals in retirement depending on the annuity you choose. An income rider guarantees a lifetime retirement income payment. The annuity can be used to cover essential expenses in retirement in conjunction with Social Security benefits. Most retirees do not want their essential expenses in retirement to be covered by investments that are subject to market fluctuation.

How do interest rates impact annuities?

An increase in interest rates allow annuities to pay higher interest rates or an increased percentage payout on income riders for variable annuities.

How do you know if an annuity is right for you?

It is always recommended that you consult with your financial planner or financial professional to evaluate your individual situation. In doing so, he or she can help evaluate if an annuity will play a role in your financial and retirement planning.

What are the tax benefits of an annuity?

The tax benefits are that the income within the annuity is deferred until withdrawal takes place. This allows the amount that would normally be taxed in an alternative investment strategy to remain invested instead of being used to pay the taxes on the gains, dividends, or distributions in an after-tax account.

Fixed and Variable annuities are suitable for long-term investing, such as retirement investing. Gains from tax-deferred investments are taxable as ordinary income upon withdrawal. Guarantees are based on the claims paying ability of the issuing company. Withdrawals made prior to age 59 ½ are subject to a 10% IRS penalty tax and surrender charges may apply. Variable annuities are subject to market risk and may lose value.

Annuities are complicated vehicles that need to be explained by a financial professional. We recommend that before making any decision regarding annuities that you read the prospectus and understand the benefits and the characteristics of that annuity. For further questions about retirement preparedness, please contact the Trost Financial team here.