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annuities

Annuities 101

Everything You Need to Know About this Polarizing Term

What would you guess is the number one reason why people decide not to purchase a fixed index annuity with an income rider as part of their overall retirement income plan? It’s not because of surrender charges, fees, or lower returns. It’s because the benefits of a fixed index annuity with an income rider simply sound too good to be true.

Fixed Index Annuity Benefits

First things first; let’s review:

  • How can your principal actually be protected against all stock market losses, when you have never had, or been offered, this benefit before?
  • How can your income be guaranteed to be paid to you for as long as you live, even past age 100, and even if your account value reaches $0 when you have never had, or been offered, this benefit before?
  • How can you earn a portion of index gains when the market goes up but never ever lose any of your current or previous gains from future losses, when you have never had, or been offered, this benefit before?
  • How can you reduce the total fees you pay to an average of 1% when you have never had, or been offered, this benefit before?

How can all these things be true when you have wanted all of these benefits for a long time, but no one has been able to provide them to you? If you don’t have these benefits in your financial plan now, they surely can’t exist, otherwise, you’ve made a big mistake. If you don’t have these benefits in your plan, your advisor may not be looking after your best interests.

Why it’s NOT Too Good to Be True

Here’s the key: a fixed index annuity with an income rider is not too good to be true; you do get all these benefits. It’s how they work. It’s why they were designed. It’s the Secret Ingredient. The goal of this article is to provide you a clear, factual, understandable explanation of fixed index annuities with income riders. Our definition of “understandable explanation” is a fair and balanced analysis which includes an accurate description of what a fixed index annuity with an income rider is, how it works, the advantages, the disadvantages, and multiple case studies showing different uses and applications for a fixed index annuity with an income rider based on different circumstances.

What really is a fixed index annuity with an income rider? An extremely summarized version of a definition for a fixed index annuity with an income rider is: a contract with an insurance company that can be funded with cash (after-tax money) or IRA money, guarantees your principal against all stock market losses regardless of severity, protects all previous and current gains against all future stock market losses, guarantees your income for as long as you live even past age 100, provides you an opportunity for a portion of index gains, provides income tax-deferred growth of all earnings, is subject to surrender charges limiting your total liquidity, limits your overall returns providing lower returns than the stock market, taxes gains as ordinary income, and carries an annual fee (in most cases) to guarantee your income for life.


SEE ALSO: Your Roadmap to Success: A Comprehensive Written Retirement Income Plan

Annuities Defined

An annuity is defined as follows by www.merriam-webster.com as a fixed amount of money that is paid to someone each year. Isn’t that what retirees and pre-retirees want from their money? What is the one constant desire retirees have for their money? It’s to receive income for as long as they live, guaranteeing they will never be without income, thus eliminating their fear of running out of money.

An income rider is an additional benefit you can add to your fixed index annuity that carries an annual fee (in most cases). The main purpose of the income rider is to guarantee your income, and your spouse’s income if married, for as long as you live, regardless of market performance, how long you live, or how much money remains in your account. Buying an income rider is simply buying insurance to guarantee your income will never run out for as long as you live.

Think about this, if you are like most retirees, your biggest fear is running out of money before you die, and even if you have had an advisor for many years, you probably didn’t know you could buy insurance that guaranteed your income for life, for an extremely low overall total annual cost, typically averaging 1%. We have found the vast majority of retirees and pre-retirees can buy an income rider to guarantee their income for life, and pay lower overall fees than they are currently paying on their current assets with no income guarantees. An income rider will guarantee you will not run out of money, guaranteeing income will be paid to you for as long as you live.

The Annuity Debate

The word “annuity” is very polarizing to consumers with some people seeming to love them and some people seeming to hate them. At Peak Financial Freedom Group, we respectfully believe that the majority of the negative opinions about annuities, whether it be from an advisor, consumer, or media source, are based on a minimum amount of facts and a maximum amount of conjecture. We have found that many people who aren’t experts on annuities want to give you their opinions on annuities, and you may have heard the crude old saying about everyone having an opinion. To be more politically correct, we created our own saying:

Opinions are like armpits, everyone has two, and it is probably safer to stay away from both of them!

-Dan Ahmad and Jim Files, Peak Financial Freedom Group

 

While our saying is not as famous as the comments below, we just believe they mean about the same thing:

Opinion is the medium between knowledge and ignorance.

~ Plato 

Beware of false knowledge; it is more dangerous than ignorance.

~ George Bernard Shaw 

Ignorance is the curse of God; knowledge is the wing wherewith we fly to heaven.

~ William Shakespeare

By giving us the opinions of the uneducated, journalism keeps us in touch with the ignorance of the community.

~ Oscar Wilde

 

While many people may want to give you “their opinion” on annuities, we only give you cold, hard, facts. Facts about the stock market, risk, returns, fees, taxes, asset allocation, having a written plan, and even on fixed index annuities with income riders.


SEE ALSO: What is a ‘Safe’ Income Withdrawal Rate?

On the website of the Securities and Exchange Commission, the SEC defines annuities as:

An annuity is a contract between you and an insurance company that is designed to meet retirement and other long-range goals, under which you make a lump-sum payment or series of payments. In return, the insurer agrees to make periodic payments to you beginning immediately or at some future date.

Annuities typically offer tax-deferred growth of earnings and may include a death benefit that will pay your beneficiary a specified minimum amount, such as your total purchase payments. While tax is deferred on earnings growth, when withdrawals are taken from the annuity, gains are taxed at ordinary income rates, and not capital gains rates. If you withdraw your money early from an annuity, you may pay substantial surrender charges to the insurance company, as well as tax penalties.

There are generally three types of annuities – fixed, indexed, and variable. In a fixed annuity, the insurance company agrees to pay you no less than a specified rate of interest during the time that your account is growing. The insurance company also agrees that the periodic payments will be a specified amount per dollar in your account. These periodic payments may last for a definite period, such as 20 years, or an indefinite period, such as your lifetime or the lifetime of you and your spouse.

In an indexed annuity, the insurance company credits you with a return that is based on changes in an index, such as the S&P 500 Composite Stock Price Index. Indexed annuity contracts also provide that the contract value will be no less than a specified minimum, regardless of index performance.

In a variable annuity, you can choose to invest your purchase payments from among a range of different investment options, typically mutual funds. The rate of return on your purchase payments, and the amount of the periodic payments you eventually receive, will vary depending on the performance of the investment options you have selected.

Variable annuities are securities regulated by the SEC. An indexed annuity may or may not be a security; however, most indexed annuities are not registered with the SEC. Fixed annuities are not securities and are not regulated by the SEC. You can learn more about variable annuities by reading our publication, Variable Annuities: What You Should Know.

**We have provided this information as a service to investors. It is neither a legal interpretation nor a statement of SEC policy. If you have questions concerning the meaning or application of a particular law or rule, please consult with an attorney who specializes in securities law.

Important Questions to Ask Yourself

Sometimes consumers tell us they have heard that annuities are not good for them. We will then ask them:

  • What kind of annuity are they referring to?
  • Are they talking about an old-style single premium immediate annuity with life-only payments?
  • Are they talking about an old-style single premium immediate annuity with time-specific payments?
  • Are they talking about a fixed deferred annuity?
  • Are they talking about an equity-indexed annuity?
  • Are they talking about a hybrid indexed annuity?
  • Are they talking about a variable annuity without an income rider?
  • Are they talking about a variable annuity with an income rider?
  • Are they talking about a fixed index annuity without an income rider?
  • Or are they talking about a fixed index annuity with an income rider?

Of course, they have no idea what type of annuity they are talking about. They typically respond they didn’t know there was more than one kind of annuity or that they just thought, or have been told, all annuities were bad.

There are many kinds of annuities, however, and they all have their benefits. There are life-only annuities, variable annuities, variable annuities with income riders, immediate annuities, fixed annuities, equity index annuities, hybrid annuities, single premium immediate annuities, or fixed indexed annuities without income riders.

If you think an annuity of any kind might be a smart move for you, reach out to schedule a conversation with us. With Peak Financial Freedom Group as your trusted partner, we can start working toward your financial freedom today.

Want more information on annuities? Check out our book, Momma’s Secret Recipe for Retirement Success.


This information is provided and intended to be used for general educational and informational purposes only and is not intended as a solicitation for you to buy or sell any financial product. This information is not mean to be relied upon as actual financial or tax advice. The ideas, thoughts, and strategies presented here are those of the Management Team and provide an insight to our views at Peak Financial Freedom Group, LLC and its affiliates. None of this information is intended to give you specific tax, investment, real estate, legal, estate, or financial advice. The planning and ideas in this data are not suitable for all individuals or situations. Consult a qualified financial professional before making any investment decision.
All research information provided is public source material. This material may also include additional references to articles, news, commentary, opinions, viewpoints, analyses, and other information developed by Peak Financial Freedom Group and/or affiliated and/or unaffiliated third parties, which is subject to change at any time without notice. Information and opinions provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. Peak Financial Freedom Group and its affiliates are not responsible for errors or omissions in the material and do not necessarily approve of or endorsed the information provided. This information is provided “as is” and no party makes any representations or warranties of any kind either express or implied, with respect to this information. Peak Financial Freedom Group, LLC and its affiliates do not warrant the information provided to be correct, complete, accurate or timely, and is not responsible for any errors or omissions in the information or any investment decisions, damages, or other losses resulting from, or related to, use of said information. The ideas, thoughts, and strategies presented here are those of our management teams and provide an insight into our views on Peak Financial Freedom Group, LLC, and its affiliates. Every detail presented here is subject to change without notice at any time.
Peak Financial Freedom Group
2520 Douglas Boulevard, Suite 110
Roseville, CA 95661

DISCLOSURE:

All presentation data is provided and intended to be used for general educational purposes only and is not intended as a solicitation for you to buy or sell any financial product.  By contacting Peak Financial Freedom Group, you may be offered additional information regarding the purchase of financial products. None of the material presented is intended to give you, nor are the presenters engaged in giving you, specific tax, investment, real estate, legal, estate, retirement, or financial advice, but rather to serve as an educational platform to deliver information; nor is it intended to show you how the strategies presented can specifically apply to your own tax, investment, estate, financial, or retirement position, but rather to offer an idea of how these principles generally may apply. Consult with a qualified investment, tax, legal, and/or retirement advisor before making any decisions.

Stocks, bonds, or mutual funds have risks and can lose principal, even with a stop loss, and there are no guarantees of gains, as past performance is not indicative of future positive investment results. Hypothetical examples are used to explain concepts and are not indicative of potential results you could receive. The sale or liquidation of any stock, bond, IRA, certificate of deposit, mutual fund, annuity, or other asset to fund a new portfolio and/or annuity may have tax consequences, early withdrawal penalties, or other costs and penalties as a result of the sale or liquidation. You can’t invest directly into a stock market index. A fixed index annuity with an income rider can protect your savings from losses and provide you guaranteed lifetime income, but you could incur surrender charges, gains aren’t guaranteed, you’ll pay a fee, and guarantees are backed by the financial strength claims paying ability of the issuing annuity company. If you place assets under management with our firm, we receive advisory fees for assets you place under management and commissions from insurance companies you buy products from. Seminars, radio shows, TV productions, book releases, magazine and book promotions are sponsored, promoted and paid for by Peak Financial Freedom Group, LLC.

Peak Financial Freedom Group LLC and Fiduciary Solutions LLC do not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by an unaffiliated third party, whether link to Peak Financial Freedom Group LLC’s web site or incorporated herein and take no responsibility therefore. All such information is provided solely for the convenience purposes only and all users thereof should be guided accordingly.

2019(1), 2020(2), and 2021(3), Five Star Professional Wealth Manager Award - Dan Ahmad and Jim Files have been nominated for and have won the 2019, 2020, and 2021 Five Star Wealth Manager awards. Wealth managers do not pay a fee to be considered or placed on the final list of Five Star Wealth Managers. Once awarded, wealth managers may purchase additional profile ad space or promotional products. Award does not evaluate quality of services provided to clients. The Five Star award is not indicative of the wealth manager’s future performance. The inclusion of a wealth manager on the Five Star Wealth Manager list should not be construed as an endorsement of the wealth manager by Five Star Professional or this publication. Working with a Five Star Wealth Manager or any wealth manager is no guarantee as to future investment success, nor is there any guarantee that the selected wealth managers will be awarded this accomplishment by Five Star Professional in the future. Award winners represent an exclusive group of wealth managers who have demonstrated excellence in their field by satisfying 10 objective selection criteria. For additional information on the Five Star award, including a complete list of the 10 objective selection criteria and their research/selection methodology, go to https://fivestarprofessional.com.

Investment advisory services are offered through Fiduciary Solutions, LLC, a Registered Investment Advisor (CRD #148118). Insurance products and services are offered through PFFG Insurance Agency LLC, a licensed insurance agency (CA License #0N14013). Peak Financial Freedom Group, LLC is a financial planning and umbrella marketing organization, which enables the provision of multiple financial services under one brand. Peak Financial Freedom Group LLC, PFFG Insurance Agency LLC, and Fiduciary Solutions LLC are affiliated entities with common ownership and control. Jim Files is licensed as an investment adviser representative with Fiduciary Solutions LLC (CRD # 1620449) and is a licensed insurance producer with PFFG insurance Agency LLC (CA Insurance License #0F06511). Dan Ahmad is licensed as an investment adviser representative with Fiduciary Solutions LLC (CRD # 1491561) and is a licensed insurance producer with PFFG insurance Agency LLC (CA Insurance License #0732913).

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