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Retirement Annuities Explained

BECU Investment Services

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Having enough retirement income is a top concern for many Americans nearing or in retirement. Even though they may have saved consistently throughout the working years, they may be concerned that their retirement plans will succeed. A successful retirement plan could provide the ability to maintain your lifestyle for the duration of your life.

Having enough retirement income for what you need and want is essential and must be planned for, even in the best economic conditions. A way that could help provide income safety is by using annuities as an asset class in your retirement portfolio.

Annuities Provide Safety and Income

Annuities help retirees address a specific retirement planning risk — longevity risk. Longevity risk is the risk that a retiree outlives their financial assets.
Here are other things to know about annuities:

  • Annuities provide income for life.
  • Due to their safety and growth potential, many portfolios use annuities in the financial services industry as an asset class.
  • Annuities are contractual agreements with an insurance company that provide an investor with a guaranteed income stream during retirement in exchange for a premium.
  • Insurance companies provide products such as annuities to help individuals manage their long lives.

Annuities 101

Annuities offer tax-deferred growth of earnings, protection of principal and a guaranteed lifetime income.

The three types of annuities widely used in financial planning are fixed annuities, fixed-indexed annuities and variable annuities. Like any financial product, there are pros and cons to each type, and due diligence in investigating any annuity should take precedence before purchasing one for your retirement portfolio.

Variable Annuities

Variable annuities are tax-deferred growth opportunities, but with the risk of principal loss. Variable annuities:

  • Potentially provide greater growth.
  • Provide a guaranteed income for life.
  • Don't include principal protection.
  • Have market-type returns that are are based on the asset class in the portfolio.
  • Allow you to invest in mutual funds (i.e., sub-accounts).
  • Provide a tax-deferral benefit for non-qualified investments, not applicable to IRAs, 401(k), TSP, etc.
  • Have limited investment choices in comparison to the Universe of Mutual Fund Choices.
  • Have fees that can range from 3-5%, or more.

Variable annuities can be expensive and come with many fees, which decreases the accumulation value. Variable annuities are market sensitive and may incur a loss to the investor. Many times, the investor needs to understand this complex product. Working with a financial advisor to know if a variable annuity is appropriate for your situation is essential.

Fixed Annuities

Fixed annuities provide growth opportunities with income for life and offers principal protection. Fixed annuities:

  • Offer principal protection — original principal plus all credited interest is guaranteed.
  • Offer growth — a fixed rate for a declared period.
  • Include tax-deferral — a benefit for non-qualified assets, not applicable to IRA, 401(k), TSP, etc.
  • Have no fees on base product.
  • Provide a lifetime income.

Before purchasing a fixed annuity, investors should work with their financial advisor and consider the issuing company's rate, terms, ratings and service levels.

Fixed-Indexed Annuities

Fixed-indexed annuities provide growth opportunities with income for life and offers principal protection. Fixed-indexed annuities:

  • Offer principal protection — original principal plus all credited interest is guaranteed.
  • Offer growth — credited interest tied to index performance. Some products offer uncapped strategies — an inflation hedge on the portfolio.
  • Include tax-deferral — a benefit for non-qualified assets, not applicable to IRA, 401(k), TSP, etc.
  • Provide guaranteed income for life.
  • Provide an inflation hedge — growth is designed to increase when prices are appreciating.

Investors should consider the fixed annuity index, participation rates, and service levels of the issuing company before purchasing a fixed-indexed annuity.

Both fixed and fixed-indexed annuities provide an alternative for retirees seeking income other than from traditional staples such as certificates of deposits, money market accounts, or bonds. For those seeking income and safety, annuities might be an asset class they may want to consider.

Talk to a Financial Advisor

Financial advisors at BECU Investment Services are here to help. Our team will take the time to get to know you, understand your goals and plan and implement a financial and retirement strategy that's appropriate for you. Set up a complimentary consultation or call 206-439-5720 today.

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Important Disclosures

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial professional prior to investing.

Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments.

Fixed and variable annuities are suitable for long-term investing, such as retirement investing.  Gains from tax-deferred investments are taxable as ordinary income upon withdrawal. Guarantees are based on the claims paying ability of the issuing company. Withdrawals made prior to age 59 ½ are subject to a 10% IRS penalty tax and surrender charges may apply. Variable annuities are subject to market risk and may lose value.

Fixed indexed annuities (FIA) are not suitable for all investors. FIAs permit investors to participate in only a stated percentage of an increase in an index (participation rate) and may impose a maximum annual account value percentage increase. FIAs typically do not allow for participation in dividends accumulated on the securities represented by the index. Annuities are long-term, tax-deferred investment vehicles designed for retirement purposes. Withdrawals prior to 59 ½ may result in an IRS penalty, and surrender charges may apply. Guarantees are based on the claims-paying ability of the issuing insurance company.

All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.

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