Understanding Annuities is Basic for Retirement

A recent Gallup poll revealed that the biggest financial worry facing Americans is their retirement savings. In fact, only about 60 percent of those surveyed expect to live comfortably when they retire.

The stock market's recent volatility has prompted many investors to reevaluate their expectations and look for ways to protect their retirement savings from market risks. Many Americans are turning to fixed annuities for stable, predictable growth and guaranteed results.

Basic Benefits of an Annuity

Guaranteed Income for Term or Life

A fixed annuity is a contract between you and an insurance company. You fund it with a one-time lump sum (single-premium annuity) or a monthly premium (flexible-premium annuity). The institution agrees to return your money, plus interest, according to the distribution schedule that you choose when you retire. Payouts may take place over a certain number of years (period certain); throughout your lifetime (single life only); for your lifetime or a certain period, whichever is longer (life with guarantee); or for your lifetime plus that of a surviving spouse (joint and survivorship).

Predictable Returns

Throughout the term of the agreement, a fixed annuity earns interest at a fixed rate, independent of market fluctuations. Thanks to this predictability, you can determine the amount of regular income you would like to receive during retirement and invest at a rate that will guarantee that income. For example, to guarantee a fixed monthly payment of $1,000 for 20 years starting at age 65, you can pay a set monthly premium based on your age, health, and gender.

Tax-Deferred Growth Without Limits

Fixed annuities grow tax deferred until you retire, and unlike some other tax-advantaged retirement savings plans, they usually aren’t subject to federally mandated contribution limits. This can be particularly useful when investing funds obtained through the sale of a business or receipt of an inheritance.

An Annuity Buys Basic Financial Security

Market performance over the past few years may have you worried about what you can expect from your retirement. With fixed annuities, you can help protect your retirement savings from the economy's ups and downs.

Before purchasing, be aware that most annuities have surrender charges that are assessed during the early years of the contract if the contract owner surrenders the annuity. In addition, if you surrender the contract before age 59½, you may be subject to a 10 percent federal tax penalty. Withdrawals of annuity earnings are taxed as regular income. The guarantees of fixed annuity contracts are contingent on the claims-paying ability of the issuing insurance company.