The Insured Retirement Institute (IRI) – a trade association for the retirement income industry – advocates annuities as a vehicle that can help provide retirees income, guaranteed by the insurer. The organization has been actively educating and lobbying legislators to expand annuity access as part of employer-sponsored retirement plans (1). Under this scenario, whatever portion the investor contributes to an annuity option in his 401(k) would be eligible for distribution throughout his lifetime based on an estimated calculation of life expectancy.
A deferred annuity is a contract between an insurance company and an individual. The individual pays a one-time or ongoing premium in exchange for eventual payouts that include both return of premium plus interest (2).
There are many types of annuities. They are complex and include additional fees and restrictions that make them more expensive than other types of investments. Then again, there are no other products that guarantee a combination of minimum income payout, an option for guaranteed income for life and a guaranteed death benefit. It’s important to work with a financial professional to ensure an annuity is appropriate for your situation, and to choose the best option. We would be happy to help you with that evaluation.
Outside of a qualified workplace plan, retirees may purchase an annuity to diversify their retirement portfolio. Historically, bonds offered guaranteed income that retirees could count on, but today’s lower yields have investors searching around for other alternatives. An annuity can offer a similar level of guaranteed income without market risk.
In a fixed-index annuity (FIA) an investor pays premiums to an annuity company, which then invests to earn enough money to distribute contractual payouts plus interest, as well as generate revenues to run the company and hold a general reserve fund. Because the insurer does the investing, it bears all the market risk. With an FIA, the investor’s principal is protected from market volatility and he receives a minimum interest guarantee (3).
Some fixed-index annuities are linked to a specific index, such as the S&P 500. The insurer provides the annuity owner a certain percentage of the index’s return but limits any losses. That way the investor can earn more income in any given year, based on how well that index returns(4).
Note that when the owner withdrawals money from an annuity, regardless of weather it is part of or separate from the workplace retirement plan, the full distribution is taxed as ordinary income, not as long-term capital gains. However, note that when annuity interest is earmarked to pay for long-term care insurance premiums or qualified long-term care expenses, it may be withdrawn tax-free (5).
(1) Mark Schoeff, Jr. Invest News. March 4, 2021
(2) David Rodeck and John Schmidt. Forbes. February 4, 2021
(3) Insurance News Net. March 3, 2021
(4) Sandra Block. Kiplinger. february 19, 2021
(5) Ken Nuss. Kiplinger. February 12, 2021
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