An Annuity Products Update

Everyone is trying to figure out the best way to turn a nest egg into an income stream that will last throughout retirement.  Retirees and would-be retirees need to consider matching their fixed and best-case, inflation-adjusted sources of income against their fixed expenses. 

For those who are retiring with a large nest egg and who don’t have enough fixed and guaranteed sources of income to match their fixed expenses, an annuity might fit the bill.

The single premium annuity is specifically formulated for those who don’t have much time and want to receive the benefits of their annuity immediately so they can enjoy their retirement.  The single premium annuity is safe and guaranteed income that cannot be outlived by the consumer,

Single Premium Immediate Annuity

• Your pay out begins one month after you purchase the annuity and continues for   the remainder of your lifetime or a predetermined number of years.
• This is an attractive option for those interested in turning a tax-qualified rollover, mature CD, or inheritance into income right away.
• The income payments are not taxed until you receive them at which point they may not even be completely taxable.
• You may be able to accelerate payments but this type of single premium annuity cannot be surrendered.

This kind of annuity allows you to make a single premium payment, usually ranging anywhere from $5,000 to $1 million, and then you receive a payout which usually comes in the form of monthly installments.  If you want a fixed and dependable stream of income that covers your basic living expenses annuity is just such a tool.

Fixed Annuities

Fixed annuities are long term investment products underwritten by insurance companies. There are two types of fixed annuities; the single premium annuity, which is for lump sum investments, and the premium annuity, which allows multiple contributions in the investment.

A fixed annuity works a little bit like a bank certificate of deposit with the added advantage of tax deferred earnings. Like a CD, each investment is given an initial earning rate which is guaranteed for a set period of time, typically a year. On the anniversary of the investment, a new rate is assigned based on the economic conditions at the time.

The interest earnings on fixed annuities are tax deferred until you withdraw them and then are subject to normal taxes. In addition, a ten percent excise tax penalty will also be assessed if you withdraw the money below age fifty-nine and one-half. There are no initial or annual fees assessed for investing in an annuity.

Like CD’s, early withdrawal or surrender charges will be assessed for withdrawals that take place within a period specified in the contract. This period typically lasts from five to seven years. The amount of the penalty declines over time. Most annuities will not invade the principal value of the contract to collect the surrender charge.

Most annuities allow annual withdrawals of 10% of the account value without incurring surrender charges. For more information, contact a financial advisor.

Indexed Annuities

A new study on index annuity performance is countering some negative conclusions about this performance that have been circulating.

The negative conclusions have appeared in both in theoretical academic papers and in articles in the popular press, contend David F. Babbel, Geoffrey VanderPal and Jack Marrion in research findings the three have posted online at the Wharton Financial Institutions Center.

Some index annuities have produced returns that have been truly competitive with bank certificates of deposit, fixed rate annuities and taxable bond funds, the researchers write.  In addition, articles that are critical of index annuities often contain dubious assumptions which lead directly to negative conclusions previously circulated, they say.

The three reached the following conclusions in their study:

- Annuity returns have been competitive with alternative portfolios of stocks and bonds.

- Their design has limited the downside returns associated with declining markets.

- The products have achieved respectable returns in more robust equity markets.

- Studies that have criticized FIAs are typically based on hypothesized crediting rate formulae, constant participation rates and caps, and unrealistic simulations of stock market and interest rate behavior, but when actual policy data are used, the conclusions change.

Most existing performance studies have two limitations, according to the researchers.

First, the studies “assume crediting formulae that are rarely used and crediting rates that are seldom observed,” say the researchers. This creates problems when readers assume the theoretical results are somehow representative of the index annuity world, they contend.

Second, many such studies make assumptions about stock market and interest rate behavior that the researchers say are not well supported.“This can lead people to make inferences about actual FIA behavior that are unjustified,” they write.

The three say their own study “examines these limitations and shows how actual index annuity returns are at odds with many of the hypothetical conclusions.”

The “Real World Index Annuity Returns” study is available here.