Annuities: What is an Annuity, and What are the Best Annuities for Your Retirement Strategy in 2020?

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What is an annuity

What is an Annuity?

An annuity is most easily understood as a contract between an individual (annuitant) and a life insurance company who agrees to make equal payments to the individual over a specified period of time. Sometimes that time is a certain number of years, and other times it can be for the lifetime of the annuitant and/or their spouse. There are a few different variations of annuities that will be discussed later on in the article.

Retirement Strategy

Knowing that an annuity is a contract with a life insurance company that guarantees to pay you equal amounts over a specified period of time why should they be a part of your retirement strategy in 2020? Westfall Insurance is a big believer in diversification of assets in retirement. When we make that shift to retirement and are past our best working years, many of us are dependent on certain investments and/or entities to provide us our income.

Social Security, for example, is something we are taxed for our entire working lives. In exchange we are promised a monthly payment from the government for as long as we live. It was announced today that President Donald Trump’s bill to cut payroll taxes could deplete the social security fund as soon as 2023. While that could all just be hearsay, the Social Security program is always a hot topic of discussion and the future of it is uncertain. 

Annuities are the closest product on the market that mimics Social Security’s structure as guaranteed payments in monthly or annual intervals to the annuitant over their lifetimes. 

While the effectiveness and value of an Annuity is dependent on the structure and fees associated with it and is up for debate amongst many “financial gurus” Westfall Insurance believes the concept of a program guaranteed to pay you monthly over your lifetime is ALWAYS worth a closer look, and we are here to solve the question of “What are the best annuities in Portland for my retirement strategy?

Best Annuities

Shopping for Annuities in Portland is different than shopping for Annuities in another city and/or state. Every insurance company has regulations on what and where they are able to market and offer their products. Outside of location, there are a few factors to consider when shopping for the best annuities for your retirement strategy. These factors are: Structure and Fees.

  1. Structure

There are two to three different factors contributing to the structure of an annuity that need to be carefully considered. These factors are: Accumulation Structure, Annuitization Structure, and Riders.

Accumulation of Annuities:

The accumulation of annuities depends on how long the accumulation phase is and how the interest is credited to the cash value. 

The accumulation phase length is referring to how the policy is funded. Here are the ways it can be funded:

  • Accumulation: Equal payments over a period of time 
  • Immediate: A one-time payment that can begin paying out immediately, or can be deferred and allowed to accumulate more interest before being annuitized (Turned into monthly payments)

There are Three Different Ways to Accumulate Interest and Cash Value in an annuity. These are:

  1. Fixed Annuities  are the safest annuities  that guarantee an annual or monthly interest rate that the insurance company guarantees to credit the policy, usually 3-5%.
  2. Fixed Indexed Annuities (FIAs) are considered to be the best of both worlds. In an FIA, insurance company will credit the policy with a minimum guaranteed interest rate, usually 0-3% with the potential to credit the policy up to a certain percentage, usually 8-15% depending on the performance of the markets the annuity mirrors. The big benefit here is that we love at Westfall Insurance, is that the cash value NEVER LOSES money. 
  3. Variable Annuities carry the most risk, but they yield the biggest return potential. In a variable annuity, the cash value of the policy is dependent on the market it performs in and can lose money during a down economy. These are very similar to Mutual Funds.

To summarize, annuities can either be funded by equal payments made over a certain amount of time, or they can be funded with one single lump-sum payment. The cash value of the annuities can either be guaranteed, indexed, or invested directly into the stock market. 

Annuitization Phase

The annuitization phase of an annuity is when the insurance company begins to make payments to the annuitant. The annuitization phase is classified by how long the payments will go for. Annuities come with any one of these annuitization types:

  • Life Option: This means the insurance company agrees to make payments to the annuitant for as long as the annuitant lives. This structure is typically used in the retirement strategy of many as it is designed to defend against outliving your income.
  • Joint-Life Option: This is an annuity purchased by a married couple. The payout of these plans is dependent on the life expectancy of both spouses. When one spouse dies, the benefit amount paid to the remaining spouse will be less.
  • Life with Period Certain: Opting for the life or joint life option leave the risk of the annuitant dying too early and the money being kept by the insurance company. A period certain option guarantees that even if the annuitant passes during the period certain window, the insurance company will continue to pay a named beneficiary until the end of the period certain.
  • Lump-Sum: Annuities can be paid out in one lump sum. We don’t go over these too much because these are not plans that are a defense to outliving your income.

Essentially, annuities are most often paid out over the lifetime of the annuitant. Obviously this is not a great deal if the annuitant dies early and the money invested into the annuity is kept by the insurance company. To hedge against this, an annuitant would structure their policy with a period certain option that would guarantee payments would be paid to a beneficiary if the annuitant dies early. And of course, annuities can be paid in a lump-sum amount as well. 

Riders

Riders are additional benefits that can be added onto policies for an additional cost. The riders that Westfall Insurance thinks should be considered are: long term care riders and inflation riders.

Long Term Care Rider

One of the biggest fears of retirement is getting sick/injured and ending up in long term care. Long term care is very expensive and forces many Americans to run out of their retirements exceptionally fast. There are long term care insurance policies available, but the one downside to them is that they do not accumulate any cash value. That means that if you acquire long term care insurance, but you never end up having to use it, the insurance company keeps the money. A long term care rider on an annuity provides protection if needed, but if not, it builds more cash value.  

This is why the long term care rider should be considered when purchasing an annuity. This retirement strategy hedges against two of the three biggest fears of retirement which are living too long and going into long term care. While it won’t provide as comprehensive protection as a full long term care policy, it still provides solid protection. Another retirement strategy we recommend is using the monthly payment from the annuity to fund the monthly premium of the long term care policy. 

Inflation Rider

Inflation is the decreasing purchasing power of money. Essentially, inflation means that your money is losing value. The inflation rate is higher than the interest in checking, money market accounts and Certificates of Deposits offered by banks. Imagine that, money sitting in a bank account not being touched is losing its value. If you own a CD or have money sitting in an account at the bank and are not happy with your interest rates, please contact us! 

It’s important that you consider the benefits of having an inflation rider on your annuity, because, most annuities are structured to pay out equal amounts throughout the lifetime of the annuity. If the payout you get NOW vs 20 years from now is the same, then you are in trouble. We strongly recommend finding a policy with an inflation rider. 

2) Fees

Fees are VERY important to understand when shopping for an annuity. Every percentage point counts when we look at the magic of compound interest and its effects. Some annuities will perform amazingly in the market an yield very high returns, but the fees charged to the plans can significantly wipe those gains away. 

Another disappointing fact to accept when it comes to fees are that regardless of the performance of the annuity, the fees are typically the same percentage. This means that if the fees were 5%, they would be 5% whether the policy gained 15%, gained 0%, or lost 15%. To further illustrate, go check out the Compound Interest Calculator and change the percentage of compound interest around and you will see for yourself how just one percentage point can significantly alter the gains of the policy.

When shopping for the best annuities, it is important that you are able to see honest and transparent illustrations of the fees and structures of an annuity that will show multiple outcomes of the annuity based on the performance and the fees. 

Our Recommendation:

While we agree that everyone is unique and there is no such thing a one size fits all solution when it comes to a person’s retirement, Westfall Insurance is a huge fan of Fixed Indexed Annuities. The key here is that the money is guaranteed some sort of interest rate even if the market tanks. The important thing here is that it didn’t lose. 

If an investment loses 50%, it takes 100% in gains to gain it all back. (Example: Lose 50% of $100, you now have $50. You need to gain $50 back to be back to having $100. $50 is 100% of $50)

Aside from not only losing money, these policies have caps on them that allow the annuitant to partake in the gains of a bull market up to a certain percentage. These percentages vary, but one could expect anywhere from 8 to 15%.

Annuity Laddering is another alternative strategy to annuities that we think deserves its spotlight. Annuity laddering is simply the process of buying multiple annuity plans to diversify. An individual may have more money to play with and a higher risk tolerance and wants to protect some of his/her money so they would get a fixed or fixed index annuity, but they may also risk a portion of their money  into something like a variable annuity that has the potential to offer much higher returns. 

Why Else Do We Love Annuities?

We love annuities because of their tax favor ability. As we get older and our time horizon for growth on our portfolios begins to shrink, it is strongly encouraged to move money into safer investment vehicles to avoid living too long and outliving our money. Qualified retirement accounts like 401ks and/or IRAs are great ways to accumulate wealth during our working years. The one down-side of many of these plans is that they are taxed heavily during their distribution phase. IRAs have a minimum age requirement to draw money off of them and enforce a strong penalty of 10% if that age requirement is broken. 

Annuities are great because they can be used as a vehicle to roll money into from an IRA or 401k account tax-free! Instead of getting taxed on withdrawing your money from one of these accounts, you can roll it into an annuity and continue to gain tax free interest. We like to compare this to a 1031 real estate exchange where the capital gains made from a property are not taxed if that money is rolled into the purchase of another property.

Annuities are great because they can be used as a vehicle to roll money into from an IRA or 401k account tax-free! Instead of getting taxed on withdrawing your money from one of these accounts, you can roll it into an annuity and continue to gain tax free interest. We like to compare this to a 1031 real estate exchange where the capital gains made from a property are not taxed if that money is rolled into the purchase of another property.

Annuities are great because they can be used as a vehicle to roll money into from an IRA or 401k account tax-free! Instead of getting taxed on withdrawing your money from one of these accounts, you can roll it into an annuity and continue to gain tax free interest. We like to compare this to a 1031 real estate exchange where the capital gains made from a property are not taxed if that money is rolled into the purchase of another property. 

So, let’s summarize what we’ve discussed and did we answer all questions?

What is an Annuity?

Annuities are a contract between a life insurance company and an individual (annuitant) or spouses (joint-annuitants) that guarantees to pay the annuitant a lump-sum, monthly/annual specified amount either for a certain period of time or throughout the entire lifetime.

What are the Best Annuities to get?

There is no single answer to what the best annuities are. The best annuities are ones that meet your goal of not outliving your income. Aside from meeting the bare minimum requirements of not outliving your income, the best annuities also provide things like protection against inflation and the fear of going into long term care. The best annuities in Portland, or any place for that matter will vary based on which companies are allowed to market and offer their annuities geographically.

Why are Annuities a Good Retirement Strategy?

We believe annuities are an excellent addition to a retirement strategy in 2020 for a number of reasons. Annuities can be used to provide income for life. This is especially important to note given the uncertainty that is currently plaguing the world. Social Security has always been that one thing Americans could count on, and the threat of it going away is very real. Annuities are an excellent alternative retirement strategy to combat the risk of losing social security.

As mentioned earlier, the best annuities provide additional benefits like protection against inflation and long term care protection. This addresses 2 of the 3 biggest fears of retirement experienced by many Americans.

Annuities suit the needs of anyone looking to put money away into another retirement strategy vehicle. Fixed, Indexed and Variable annuities all carry some risk and reward potential.

Lastly, annuities can be funded from rolling over retirement account money without paying the taxes on the transfer. This allows the money that was rolled over to not lose any of its value and to continue growing interest tax-free.

Where Can You Find Annuities in Portland? 

Well, the most obvious answer is, Westfall Insurance! With that being said, there are many qualified individuals and brokerages in the Portland area qualified to assist. If you are looking for the best annuities and want to know more about options available, fill out a form here, book an appointment with us HERE, or call us directly at 1 (866) 985-0204.

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