FAQs about Annuities
Who set up the first annuities?
The earliest reference in the United States to annuities is around 1760. A company in Pennsylvania was formed to benefit Presbyterian ministers and their families. Ministers would contribute to the fund in exchange for lifetime payments. That original company still exists.
It wasn't until 150-years later that Americans could buy annuities outside of a group.
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The first type of annuity was a fixed annuity. It paid interest at a rate that fluctuated over time.
The instability of banks around the Great Depression made annuities much more popular. Insurance companies then and now are seen as stable institutions.
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In 2020 approximately $220 billion of annuities were purchased.
Is there a "too young" and a "too old" for annuities?
Yes, you can be too young. If you are in your 20's or 30's you have lots of time on your side. Protecting your principal today is less important when those dollars won't be spent for decades and decades.
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What is a good minimum age? Annuities can be a good fit for anyone within 10-years of retirement. If you plan to retire at age 62, around 52 might be a good type to take a look and see if some of your retirement savings would benefit from guarantees.
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From your 50's to age 75 or so annuities are often a great fit and accomplish what few other accounts can. As you get older make sure you have enough money readily available for out-of-pocket medical expenses and other health needs.
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Most insurance companies offer annuities from age 18 to age 85 or 90. We can help you determine your suitability for an annuity.
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What does if mean when they say an annuity is tax deferred?
You are likely already familiar with the idea of tax deferral. IRAs and 401(k)s have tax deferral. You do not pay tax on the gains each year, until you choose to make a withdrawal.
The same benefit of tax deferral applies to non-qualified annuities. These are annuities funded with after tax money.
After tax money means that Uncle Sam has already been paid his due tax. Money in your checking or savings accounts are after tax dollars. When you use after tax money to fund your annuity, you have a non-qualified annuity.
With a non-qualified annuity, you get the benefit of tax deferral like an IRA or 401(k) enjoys. As your annuity earns interest each year you do not add the interest to your tax return that year. Only when you take the interest out do you pay the taxes.
A non-qualified annuity owner, unlike an IRA owner, is never forced to take money out due to age. You can allow the money to grow until you die, if you choose.
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Is tax deferral valuable? It becomes more valuable the higher your income tax rate and the longer you take advantage of the tax deferral.
Let me tell you a quite simple story that helps explain the idea of deferring taxes for a later day.
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Imagine we went out to lunch today and then the bill arrived. Unfortunately, I forgot my wallet at home and ask you to lend me $20. Being a friend, you hand me a $20 bill and I pay my check.
The next day I come over and ask you a question, "Friend, I have your $20. Would you like me to pay you today or can I pay you 10-years from now?"
Of course, you would prefer being paid today. I would prefer to keep the $20 and to earn interest on it until I pay you back years from now.
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That is how a non-qualified annuity works. Keep the imaginary $20 (and next year's $20 and the year after and the year after) in your annuity earning interest for as long as you want!
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Is there really a difference between earning 3% and 1%?
Any time you can earn more interest you are better off. You are better off in all three phases of your financial life.
When you are accumulating money, the higher interest rate account will always have a bigger balance.
When you are living on your nest egg, the higher interest rate account will have a bigger balance generating income at three times the rate of the 1% account.
When you die, your spouse, kids or grandkids will be left more money.
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It is sometimes nice to see how the above concepts would play out in real life. Let's take a look at a hypothetical situation.
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For our example, let's look at Joe and Mary. Both are 62-years old and retired.
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Both Joe and Mary have $100,000 in their IRAs. Joe earns 1% and Mary earns 3% on their IRAs.
They are both financially able to let their IRAs grow until required minimum distributions (RMDs) begin 10-years later, at age 72. This happens a lot.
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They start their RMDs at age 72 and for the next 18-years take out the minimum amount each year. Then both Joe and Mary pass away at age 90.
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How did Joe do earning 1% on his IRA? How did Mary do earning 3% on her IRA?
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At age 72 Joe had $110,500 in his IRA. From age 72 to 90 his total IRA distributions were $76,500. Passing at age 90 he left $46,400 to his heirs.
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At age 72 Mary had $134,400 in her IRA. From age 72 to 90 her total IRA distributions were $110,000. When she died at age 90 she left $83,600 for her heirs.
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Mary enjoyed $34,000 more income while alive (around $2,000 a year) and left $37,000 more to her family. Around $70,000 more than Joe, on the same starting balance!
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If your IRA is worth $200,000 the potential gains are double!
Yes, it pays to earn as much interest as possible.
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What can I expect after I purchase an annuity?
It takes a couple weeks or a little longer after you sign the application to receive your policy.
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At that time, we will review your policy for accuracy and help set up your online account, if wanted. On the secure company website, you can see all your annuity information and you can retrieve all policy statements and documents. Everything is at your fingertips.
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You will receive an annual statement shortly after every policy anniversary. We will call you each year to see if you have any questions or are in need of any service. You can call or email us at any time and we always return any messages.
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If you want to make a withdrawal, we will help you with the form that needs your signature. We provide you with copies of this form when we first deliver your policy. Annuities do not generally allow withdrawals by phone.
Systematic withdrawals can also be set up if you want to receive the same amount every month. Monthly withdrawals are direct deposited into your bank account.
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Why would I not want all of my money in the stock market?
There is a reasonable chance you might be all right with all of your retirement savings in the stock market. Or, it could prove a disaster if your sequence of returns are wrong.
Google "Retirement Monte Carlo" and you'll find interesting articles and models of how stocks and bonds and fixed accounts have performed in the past. You can input your particulars into their calculator and, like Monte Carlo, they "spin the roulette wheel" thousands of times mathematically. Sometimes you win. Sometimes you lose.
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From looking at the past they are able to "place odds" on whether you are going to outlive your money (failure) or your money is going to outlive you (success).
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When you have 100% of your money in the stock market, the range of possible outcomes is very large. You could end up a multi-millionaire or you could run out of money at age 81.
Annuities, in a way, narrow the range of possible outcomes. They can significantly reduce the risk of running out of income and place the "odds" more on your side!
How do I know if my current annuity is a good one?
Every week we talk with annuity owners about their existing fixed annuity and fixed indexed annuity. They ask if we can offer an opinion on an annuity from Jackson National, Allianz, American Equity, MassMutual, Fidelity or 101 other companies.
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We will help you assemble the information needed to offer an opinion. The most recent annual statement and the contract usually provide what is required.
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What do you look for?
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How it has performed in the past.?
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What it is earning today?
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Are there riders or special features?
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What do they cost and what do you get?
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How liquid is the annuity if you need money?
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Are there early surrender penalties and for how long do they last?
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Are your beneficiaries correct?
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Is it a qualified or non-qualified annuity?
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Other items unique to your situation.
From this detailed review you will know if your annuity is a keeper. We have a simple form to get the ball rolling for your Annuity Review.
Do you need a lot of money to get the best interest rates?
No. The best interest rates are available with modest amounts. Some annuities have a $5,000 minimum. Other annuities have a $10,000 minimum to get started. In either case you get their best rates.
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Only a few years ago you often needed $25,000 or $50,000 to receive the highest interest rates. Smaller deposits would receive a slightly lower rate. Not that way any more!
How much monthly income does $100,000 generate?
While we can't give you an exact number here, we can explain the two variables that effect the answer.
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The first variable is your age. Or, your age and your spouse's age if you want income guaranteed to you both. The older you are the larger your guaranteed monthly income will be.
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For example, a 70-year old would receive about 15% more income every month than a 65-year old.
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The second variable is whether you want to maintain control and flexibility over your annuity value, or if you want to fully relinquish your annuity value to your insurance company for larger payments.
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While the second option provides for a larger monthly income amount, very few people make this choice. By far, most annuity owners always maintain control over their account value and leave any annuity balance to their heirs when they pass.
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Use an expert that can compare several insurance companies for you. You want to make sure that you are getting the largest monthly income amount for your age and premium amount.