Annuities
Lifetime income and downside protection for retirement
Annuities can provide lifetime income and, depending on the type, downside protection. Your Merrill advisor can help you decide whether one fits your retirement plan and which type makes sense.
Key takeaways
- An annuity is a contract with an insurance company. You make a payment, and the insurer agrees to pay you income or a lump sum later.
- Some annuities provide income for life, which can help cover essential expenses.
- Some annuities help protect your principal or limit your losses in a down market, depending on the type and contract terms.
- Earnings grow tax deferred, so you’re taxed only when you make withdrawals or receive income.
- Annuity types differ in how they grow, how they pay and how much access to your money you keep.
- Guarantees are backed by the issuing insurance company’s claims-paying ability. Annuities aren’t FDIC insured, and they carry fees and limits.
- Whether annuities fit into your portfolio depends on your goals, risk tolerance, time horizon and liquidity needs. A Merrill advisor can help you compare types, costs and risks, and see how annuities may fit alongside other income sources like Social Security and a pension.
What is an annuity and how does it work?
Retirement can last decades. That makes it important to plan not only how much you’ve saved but also how you’ll turn it into income and keep that income going through market ups and downs.
An annuity is a contract with an insurance company, designed for retirement. You make a payment to the insurer. In return, the insurer agrees to pay you an income stream or a lump sum at a future date.
Some annuities focus on lifetime income. Others focus on downside protection or growth. You can use one alongside Social Security, pension income and your investments.
Your Merrill advisor can help you evaluate annuities based on your retirement income needs, goals, risk tolerance, time horizon and liquidity needs.
What role can annuities play in a retirement portfolio?
Annuities can play three roles in a retirement portfolio:
Why talk with a Merrill advisor about annuities?
Annuities have a lot of moving parts. A conversation can help you sort out which ones apply to you.
How do annuities provide lifetime retirement income?
Annuities for retirement income can add predictability to your portfolio and may help you through a range of market conditions. Combined with Social Security and pension income, they can help cover essential expenses like housing and food.
With an income annuity, you make a payment to an insurance company and choose when your income starts. Payments can last for a set period or for life. You can also add an optional lifetime income benefit to a fixed indexed or variable annuity for an additional cost.
How much you receive depends on the annuity type, the contract terms, your purchase amount, your age when income starts and the payout option you choose. Some payout options continue income to a surviving spouse, so ask a Merrill advisor how each one works.
How can annuities help provide downside protection?
Market swings can hit hardest when you’re close to retirement or already drawing income. Selling investments during a downturn can put more pressure on your savings.
Some annuities offer downside protection. Fixed annuities provide a guaranteed rate for a set period. Fixed indexed annuities protect your principal from market losses, subject to contract terms. Registered indexed-linked annuities limit losses through buffers or floors, so you can still lose money.
Protection depends on the type and the contract terms. Guarantees are backed by the issuing insurance company.
What are the different types of annuities?
Retirement annuities differ in how they pay, how they grow and how much access to your money you keep.
Annuities for lifetime income
Annuities for downside protection
What retirement risks can annuities help address?
Four common risks can affect how long your savings last. Depending on the type, an annuity may help with one or more of them.
What are the tax benefits and considerations of annuities?
- Earnings in an annuity grow tax deferred. You’re taxed only when you make withdrawals or receive income.
- Withdrawals of earnings are taxed as ordinary income. If you take them before age 59½, an additional 10% federal tax may apply.
- If you’ve maxed out contributions to your IRA or 401(k), an annuity may give you another way to add to tax-deferred savings.
- Because IRAs and other retirement plans already offer tax-deferred savings, you should purchase an annuity in such a plan only if you want other benefits an annuity offers, such as income guarantees or death benefit guarantees.
Could an annuity fit your retirement strategy?
An annuity isn’t right for everyone. A Merrill advisor can help you work through these questions and see if an annuity fits within your broader retirement income strategy.
- What will your retirement lifestyle cost, and when will you need income?
- Are you prepared to create your own retirement paycheck from your investments?
- How much market risk are you comfortable with, and do you want to protect part of what you’ve saved from market losses?
- How much access to your money do you need?
- Do you understand the fees, charges and surrender provisions?
- Are you comfortable relying on the issuing insurer’s claims-paying ability?
- How would an annuity work with your other income sources?
Talk with a Merrill advisor about annuities
A Merrill advisor will get to know your goals, risk tolerance, investing style, time horizon and liquidity needs. Together you can decide whether an annuity belongs in your plan, then review your strategy periodically to help you stay on track.
Frequently asked questions
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All annuity contract and rider guarantees, or annuity payout rates, are backed by the claims-paying ability of the issuing insurance company. They are not backed by Merrill or its affiliates, nor does Merrill or its affiliates make any representations or guarantees regarding the claims-paying ability of the issuing insurance company.
Withdrawals of taxable amounts are subject to ordinary income tax and, if taken prior to age 59½, an additional 10% federal tax may apply. Keep in mind, for retirement plans and accounts (such as IRAs and 401(k)s), an annuity provides no additional tax-deferred benefit beyond that provided by the retirement plan or account itself.
Annuities are long-term investments designed to help meet retirement needs. They are a contractual agreement where a client makes payments to an insurance company, which, in turn, agrees to pay out an income stream or a lump sum amount at a later date. Annuities typically offer (1) tax-deferred treatment of earnings; (2) a death benefit; and (3) annuity payout options that can provide guaranteed income for life. There are contract limitations, fees and charges associated with annuities which include, but are not limited to mortality and expense risk charges, sales and surrender charges, administrative fees, charges for any optional benefits, and charges for the underlying investment options in variable annuities. In addition, variable annuity contract values will fluctuate and are subject to market risk including the possible loss of principal. It is possible to lose money in a variable annuity purchased with an optional protection rider. Variable annuities have holding periods, limitations, withdrawal charges, exclusions, termination provisions, and terms for keeping them in force. Optional riders may be irrevocable and expire without use. Early withdrawals may be subject to surrender charges, and taxed as ordinary income, and in addition, if taken prior to age 59½ an additional 10% federal tax may apply. Withdrawals reduce annuity contract benefit, values and optional guarantees in an amount that may be more than the actual withdrawal.
It is important to note that indexed annuity contracts commonly allow the insurance company to change the participation rate, cap rate, and/or spread rate on a periodic — such as annual — basis. Such changes could adversely affect your return. No single index crediting method will provide the highest interest credit in all market scenarios. The guaranteed minimum cap rate/maximum spread rate are established when the annuity is purchased and disclosed in the annuity contract.
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