Choosing a Deferred Annuity

People who choose a deferred annuity aren't looking for the income to start right away.  Maybe they have a lump sum they'd like to invest now with a guaranteed stream of income to start when they retire.  Maybe they have the ability to make regular payments now and plan to take the money out starting at some point in the future.  With a deferred annuity, you are "deferring" the income coming to you until a later date.  The annuity is broken down into two parts, the savings part - where you are putting money in, and the annuity part where you are now getting the income stream.  With an immediate annuity, you are paying a lump sum of money to start immediately getting a regular income stream.  (See Buying an Immediate Annuity)

There are two basic types of deferred annuity - a fixed annuity and a variable annuity.  A fixed annuity will give you a steady income stream with a guaranteed rate for the annuity term.  It won't fluctuate with the market's ups and downs.  A variable annuity generally has a fixed portion and a variable portion.  What that means is that you may have a guaranteed income base, but you also have the potential to earn more based on what the market is doing. 

There are so many options with annuities that it is impossible to cover them all in detail.  I will go over some of the basics here.

Annuities are an insurance product and must be sold by a licensed insurance agent.  Annuities are also a tax deferred vehicle.  That doesn't mean that the money you put into one is necessarily tax free like an IRA or a 401(k).  It does mean that any earning over the years isn't taxed until you remove the money from the annuity.  The tax deferral is only on the earnings.  You can purchase an annuity in an IRA, but it has generally been considered a bad idea because the IRA is already tax deferred.  You can't double up on the tax deferred advantage, so you are losing some of the benefit. 

Most variable deferred annuities offer a guaranteed death benefit.  This means that should you die, your beneficiaries would get at least as much money back as you contributed to the plan. 

There are a couple of drawbacks to annuities.  First is the surrender charge.  Not every annuity has one, but most do.  If you decide after 3 or 4 years that you can do better elsewhere, your annuity company may charge you a fee to get out of the annuity.  Under most circumstances, the surrender charges are highest the first year until they reach 0% the 7th year.  This can effectively tie up your money unless you are willing to give up a portion to the surrender charge.  Second, the tax deferral benefit also means that if you take money out of the annuity before you are 59 ½, you will pay a 10% penalty to the IRS.  The money you invest should be considered an investment towards your retirement.

There are so many other options you should shop around.  Annuities can be very confusing and you should be careful if someone is pressuring you to purchase a specific annuity.  An agent who is not affiliated with one specific insurance agency may be able to help you find the best product for your needs from among several different insurance companies.  The best agent is one who knows their annuities AND one you are comfortable with.


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