Income Planning

For most of us, our working lives are dedicated in some part to accumulating assets for a time when we’ll no longer want to work. When retirement marks the end to that stage of life, the focus shifts to generating income from those accumulated assets.

Annuities are one such income-generating tool that offer particular benefits.

  • First, any appreciation in the value of assets invested in an annuity is tax-deferred. That means you don't pay federal taxes on your earnings until you begin withdrawing them. However, as with an IRA, you generally can't withdraw money from an annuity prior to age 59½ without incurring tax penalties.
  • Second, annuities can provide a guaranteed stream of income.*
  • Third, some annuities provide a death benefit. These life insurance-based annuities guarantee a specific death benefit that may exceed the current value of the contract.

Types of annuities

The fixed annuity was the original type. And the concept behind it is simple: In exchange for a lump-sum payment, an insurance company agrees to provide you with a guaranteed stream of income for a specified period of time. The payments are generally made monthly, and the period of time commonly selected is the lifetime of the annuitant or, in the case of a married couple, the lifetime of the last survivor.

The variable annuity is a more recent innovation. The word “variable” derives from the fact that the return on your investment in the annuity account is not guaranteed or fixed, but varies based on the performance of underlying investments, or “sub-accounts.” Until recently, variable annuities were generally used by investors seeking exposure to equities (stocks) in a tax-deferred package. Today, in addition to tax deferral, variable annuities offer a wide variety of lifetime withdrawal features that can provide a guaranteed stream of income without annuitizing. There are, however, additional costs associated with these features.

The equity index annuity was introduced in the mid-1990s. Instead of a fixed rate, the contract is linked to one or more equity indexes, such as the S&P 500 or the Nasdaq. The twist is that you have the opportunity to limit your risk of loss by also agreeing to limit your gains. This is done by selecting “participation” and “cap” rates that offer the combination of risk protection and potential reward that fit your needs.

A First Command Financial Advisor can explain the features and benefits of the various types of annuities, help you determine whether an annuity is an appropriate part of your financial plan and, if so, recommend a specific annuity product to meet your needs. To learn more, contact a trusted First Command Financial Advisor today.

* Guarantee depends on the claims-paying ability of the issuing insurance company and does not apply to the investment return or principal value of the separate account. Before buying an annuity, you should find out about the particular annuity you are considering. Request a prospectus from your Financial Advisor and read it carefully. The prospectus contains important information about the annuity contract, including fees and charges, investment options, death benefits and annuity payment options.

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