What is an annuity and how does it work?
Annuities are built for retirement.
They give people the ability to get 10% of the account value in cash every year leading up to retirement.
Annuities have been around since the Roman Empire (so over 2000 years).
So why aren’t annuities as popular as the typical retirement vehicles we hear about (401k or 403b)?
First, what are the basics of an Annuity?
An Annuity is a financial contract that you design to receive regular payments (typically for retirement) in exchange for putting a lump sum into the account upfront. Annuities are attached to the market typically offering a 6-9% interest growth rate on your money with a market floor that safeguards you from losing money if the market crashes. Additionally, Annuities offer 10% tax-deferred withdrawals before retirement. That means you get paid once a year from your retirement contract before you retire!
Why aren’t annuities the most popular retirement plan these days?
To answer this question, we must ask: why is the 401k and 403b the most popular retirement plan at this time?
In short, the government and the companies offering them get paid.
How?
- Fees – 401k and 403b contracts charge anywhere from 1-3% of the contract amount in fees each year. The contract owners, the business you work for and the financial industry that offers the 401k, gets paid by you through the associated fees yearly.
- Taxes – when you withdraw income from your account (401k or 403b) you pay income tax on the money you withdraw so the government gets their cut.
What makes an Annuity different?
- You design your contract based on your needs and desires.
- When you design a contract you see how the money in the account is used as well as the projected growth rates of your money based on how you choose to attach your money to the market.
- You are able to receive penalty free payments (10% withdraws) from your account before you hit retirement age.
- There is a market floor which ensures that you cannot lose money from your account in the event that the market crashes.
How do you start and use your annuity?
- Fund your annuity with savings or roll over funds from a different retirement account to begin your contract.
- Choose your interest index – options range from conservative to aggressive.
- Decide if you want to receive a penalty free 10% withdrawal (of the money in your account) in the years before retirement.
- Look at how your money will grow and determine when you want to retire based on how much money you’ll receive each year in your retirement years (59 & 1/2 or older).
What are my favorite annuities?
CHALLENGERS 