Annuities – What are they and why should I consider them?
By Don Nasca
An annuity is simply a contractual agreement between you and an insurance company where you agree to pay either a lump sum or a series of payments called a premium. In return for your premium payments, the insurance company agrees to pay it all back at some later time with some interest added less some fees that may or may not apply depending on the details of the contract.
Unlike a savings or checking account where you have to pay taxes each year on the interest earned, the interest earned on your premium grows tax deferred, meaning you only pay income tax when you make withdrawals. You can move money from your IRA into an annuity which means you will pay income tax on the amounts withdrawn or you can pay your premium with after-tax money (for example from your savings or checking account) and then you will pay income tax on the interest earned when you make withdrawals.
There are many ways to structure the future payments and you can include beneficiaries to ensure your money is passed on as you wish. For example, you might want monthly payments to start immediately or at some future time like, three, five, or ten years down the road. You may want those payments in a lump sum or spread out over five, ten, fifteen, or twenty years. You can even have it paid over your entire lifetime. Should you pass away and wish your spouse, children, or other beneficiaries to receive the payments, you can have it paid out for your lifetime or five, ten, fifteen, or twenty years whichever is longer. You can even adjust the percentage paid to your spouse so you receive more during the time you are both alive.
I wrote the following article on April 26, 2022. Interest rates change constantly, so this is meant to be a snapshot of that date and time. If you want a current quote, just give me a call or use the contact form on this website. I am not a financial advisor, I am a licensed insurance agent trained to understand and sell annuities. My job is to explain what is available, understand your needs and find suitable alternatives for you to choose from.
Do you have some cash earning nearly nothing in a savings or checking account that you don’t foresee needing to spend in the next several years?
Are you facing retirement soon (next ten years) or are you already there and worrying about how you will cover your expenses in the future and you are not willing to risk much in the stock and bond markets?
When we are young, we don’t spend much time thinking about retirement. In-fact, we don’t really understand it until we are about two years into it and realize this is it.
Some people do very well early on and make a prudent investment or two along the way that is waiting for them to retire and not worry about things like the cost of living. About twenty percent of us inherit money from our parents or relatives. Most people do not do so well and are not prepared to face the impacts of inflation when living on Social Security and a small savings.
Will we see some increase in the interest on savings rates? Likely yes, but without a political system that actually works for the working people, we can forget about getting pay increases or saving rate increases that exceeds or even meets inflation. Inflation in April 2022 was reported to be 8.5%, which is a national average which is clearly not relevant in larger metropolitan areas such as the Portland area where housing prices rose 17% in one year.
The best paying CD’s at this time are:
2.9% – 3yrs
3.1% – 5yrs
3.5% – 10 yrs
The best fixed, multi-year annuities today are paying:
3.15% – 3yrs
3.5% – 5yrs
3.6% – 10 yrs
So we can earn a bit more with an annuity and it grows tax deferred until you surrender the contract assuming you do not withdraw any portion along the way.
The problem is what are we earning if inflation remains far higher than the interest paid? The answer is nothing, but we are losing a lot less than leaving money sit in a savings or checking account while hoping for Santa Claus to take over the Federal Reserve and Congress.
The clear trend in the stock market now is down. If you have more than ten years to invest in equities, your gambling odds are reasonably in your favor. If you are over 55 it gets risky. At 60 or more you are playing the roulette wheel if you plan to retire and don’t have a growing income stream to cover your increasing cost of living.
There is no magic solution that guarantees results of any kind. Even banks and insurance companies fail. Bank CD’s are covered by the FDIC up to 250,000.00. Annuities are backed by the financial strength of the insurance companies selling them. Every insurance company is rated by one or more rating agencies. It is also important to understand what protections are available to you from the State you live in.
The market size of annuities in the USA is approaching one trillion dollars, so they are clearly providing value. The trick is to not fall for the marketing hype of complicated products. An independent producer such as myself, who is also not looking out for the highest commissions can run the calculations and find the best paying contracts for your situation at any given moment in time.
I am more than happy to run the numbers for you, I have access to tools that only agents have access to. These tools run the calculations on almost every known annuity contract for sale on the market. I am licensed in Washington and Oregon at this time.