June is Annuity Awareness Month

June is Annuity Awareness Month

Years ago, many companies decided to, for a variety of reasons, terminate their corporate pension plans and replace them with what is now referred to a 401k plan.  This decision created a great deal of uncertainty in the minds of employees since what was clearly defined under the pension plan is determined by the 401k plan, which is considered a defined contribution plan. Their retirement nest egg is simply the sum of their employee and employer contributions, if the employer contributes, plus any investment growth that takes place in their employee account.

One of the beneficial features of an annuity is that it can create a pension like income stream that is designed to help cover their expenses when a person retires.  Many retirees are taking advantage of an annuity by taking a portion of their 401k balance at retirement to implement an annuity.  By doing so the annuity helps mitigate some of their investment fear itself.

In helping to diversify a portfolio with respect to income and investments, it can also help to reduce investment risk and longevity risk which is the risk of outliving your money or retirement risk as it is known.  Additionally, because the annuity benefits are guaranteed by an insurance company, the annuity can provide lifetime income.  Only Social Security and corporate pension plans can make such guarantees.

Annuities have many features including the potential for rising income.  Income riders may provide a return of premium along with a death benefit along with the guarantee your monthly benefit will never expire.  Annuities eliminate market timing by staying fully invested and not jumping in an out of the market.

Annuities are not just for retirees; young investors can take advantage of many of their features as well.

It’s very important to note that annuities come with a cost but that cost must be carefully evaluated by their relative value itself.

Annuities are long-term, tax-deferred investment vehicles designed for retirement purposes. Gains from tax-deferred investments are taxable as ordinary income upon withdrawal. Withdrawals made prior to age 59 ½ are subject to 10% IRS penalty tax. Surrender charges apply. Guarantees are based on the claims paying ability of the issuing insurance company. Variable annuities are subject to market risk and may lose value.