Annuities 101: Using Annuities in Your Retirement Planning

What is an annuity? If that question has you scratching your head, you’re in the right place. I will break down these financial tools and the role they can play in retirement planning.

Annuities are a financial planning tool, which offers guaranteed results. These insurance policies are designed to be used in retirement, as they offer steady payouts at predetermined intervals of time, providing an income source. This payout plan is similar to a pension, but the key difference is that pensions are typically funded by an employer, while annuities are insurance products purchased by an individual. 

The earnings that annuities earn are also tax-deferred, meaning that you do not pay any tax on the income until you take a payout.

How Do Annuities Work?

Annuities work by first purchasing the policy. You will pay on this policy a monthly premium for a set amount of time. After your contributions are made, the insurance company will begin to pay you back. There are two phases of annuities:

• Accumulation Phase

• Distribution Phase

As the names imply, an Accumulation Phase occurs when you contribute to the annuity, depositing money in either lump sums or repeatedly and routinely, depending on your product. The Distribution Phase is when the company with which you purchased your annuity will begin to distribute those funds back to you, almost like paying you back for the money you’ve invested over time.

Types of Annuities

There are also two main types of annuities, which include:

• Deferred annuities

• Immediate annuities

As these names imply, a deferred annuity is one that may take time to build up, and payments are “deferred” or delayed until a point you set. At that point, when you’ve both reached the appropriate time frame, as well as deposit amount, you will begin your distribution phase, with funds coming back to you over time.

Deferred annuities also have alternative products under the “deferred” umbrella. In other words, you have choices amongst deferred insurance policies, which impact the manner your annuity will work. Some include:

• Fixed annuities: offer a fixed rate and never go below a set minimum

• Variable annuities: offer a growth potential, still guarantee a set payout upon death

• Structured annuities: opportunity for growth with guaranteed limits on risk

• Fixed index annuities: grow or shrink with index performance to set caps or spreads

Immediate annuities are those that require a person to deposit a large sum, upfront, all at once. The funds are then doled out at a predetermined rate and frequency. These payments may be designed to come back to you, the investor, or are set aside for a loved one named as a beneficiary, in the event of your death.

The Benefits of Annuities

Annuities are often an inclusion in retirement financial planning, as they both offer a set return, but minimize risks against market losses at the same time. Limits can be set, rates of dispersal predetermined, and timelines adjusted for your personal needs. This offers investors options and choices!

Challenges of Annuities

On the flip side, some fear annuities because of the lack of fluidity. Once you have set your timelines and payouts, the plan is rather firm. There is a lack of liquidity associated with annuities.

Any changes may be associated with fees, and once purchased and written, there is little “wiggle room” to make adjustments, even if the market is suffering.

Are Annuities Right for Me?

Annuities can have a place in any well-balanced portfolio, but which style you select again will vary depending on your needs. Before you settle on any retirement investment plan, you will want to have a full understanding of the risks and rewards.

Planning for your retirement is a very personal venture. You have very unique needs, and what your neighbor finds suitable, you may not. Working closely with your financial professional is the best way to ensure you are selecting the best products for you!

Annuity contracts are not issued by Lincoln Investment or its affiliates. All contracts, features and guarantees, including optional fixed subaccount crediting rates or annuity payout rates, are backed by the financial strength of the issuing insurance company and do not apply to any subaccount. In addition, the financial ratings of the issuing insurance company do not apply to any non-guaranteed separate accounts. The value of the subaccounts that are not guaranteed will fluctuate in response to market changes and other factors. Neither Lincoln Investment, nor any of its affiliates, makes any representations or guarantees regarding the claims paying ability of the issuing insurance company. Annuity/life insurance contracts are not insured by the FDIC or any federal government agency and are not deposits of, or guaranteed by, any bank or credit union, or a provision or condition of any bank or credit union activity or Lincoln Investment or its affiliates. Annuity/life insurance contracts may have limitations and restrictions, including possible withdrawal charges and excess adjustments where applicable, may involve investment risk, and may lose value. Withdrawals of taxable amounts from an annuity are subject to income tax and withdrawals prior to age 59 ½ may be subject to a 10% federal penalty tax.