If you are reading this article it is likely you have at least heard of an annuity and are looking for some objective clarification on the following:

  • What is an annuity?
  • What are the different types of annuities?
  • Are annuities expensive?
  • Should I consider buying an annuity for retirement?

Before we get into explaining annuities if you are getting close to retirement you should really check out the FREE retirement video on How To Avoid Running Out Of Money In Retirement While Securing Your Nest Egg! CLICK HERE

What Is An Annuity?

An Annuity is an investment with an insurance company that is specifically designed to help you avoid outliving your money.

An Annuity is different than other investments because only an insurance company can guaranty your income for as long as you live.

But just like every financial product it is not the right solution for everyone.

Annuities have pros and cons that need to be carefully considered.

And before we get into the different types of Annuities you might want to check out my Video on What is The Safest Way People In Rockford Can Invest Their Money?

What Are The Different Types Of Annuities?

There are 4 main types of annuities:

  • Immediate Annuities
  • Fixed Annuities
  • Variable Annuities
  • Indexed Annuities

Let us take a brief look at each one:

Immediate Annuities:

An immediate Annuity is a lot like a pension or like Social Security.

You trade your lump sum of money for a Guarantied Monthly Check that you can not outlive.

Just like when you get a Social Security check or a pension check you can also get a Guarantied Annuity Check that comes every month.

The amount of the check depends on how much money you are using to purchase the annuity and how old you are when you buy it.

The older you are the bigger the check.

This is a great planning tool and one of the ONLY sure-fire ways to eliminate longevity risk.

What is Longevity Risk?

It is the risk of living too long or outliving your money. No other financial tool addresses this risk as well as the Immediate annuity.

But like every financial tool immediate annuities also have some drawbacks.

Drawbacks To Buying An Immediate Annuity:

  • When you purchase an IMMEDIATE annuity you are giving up control of the money you used to buy the annuity.
  • You can not get your money back if you change your mind unless you sell the annuity on the secondary market for a deep discount.
  • If you die young you and your family may not receive the full value of what you paid into your immediate annuity.

These are some serious drawbacks, but they do not apply to ALL annuities.

These drawbacks ONLY apply to Immediate annuities and in some cases are well worth the trade-off, but this is definitely NOT for everyone.

Fixed Annuities:

A good comparison to a fixed annuity might be a Bank CD.

Although Fixed Annuities do not offer FDIC insurance like a CD, they do share many similar features and also some unique benefits:

  • Your principal is guaranteed by the Insurance Company
  • You get a pre-set guaranteed Interest rate every year.
  • Your growth of that interest is tax-deferred (CD’s are NOT tax-deferred)
  • They typically pay better interest rates than CD’s but are longer-term commitments
  • They are typically purchased in 3-year, 5-year, 7 year, or 10-year increments
  • Fixed annuities can be converted to a guaranteed lifetime income stream. (CD’s cannot)
  • You pay a penalty if you take the money out early (just like a CD)

Drawbacks To Buying A Fixed Annuity:

  • Fixed annuities are NOT FDIC insured
  • Longer-term commitments may not always be suitable
  • Early withdrawal penalties

Variable Annuities:

Ok, so have you ever heard of mutual funds?

Definition: A mutual fund is a company that brings together money from many people and invests it in stocks, bonds, or other assets.

Well, a Variable Annuity is basically a mutual fund inside a tax-deferred insurance wrapper. Investments are made in mutual funds or mutualfund-type accounts offered by the particular annuity.

What are the benefits:

  • You get many sub-accounts to choose from so you can diversify your investments
  • You can move from one sub-account to another within the Variable Annuity without any additional fees so it is flexible.
  • Many Variable Annuities offer Lifetime Guaranteed Income options that you can use without having to actually trade the investment away to guaranty an income.
  • Most Variable Annuities offer a Death Benefit that pays a locked-in value even if the market tanks.
  • The returns on the investments are tax-deferred.
  • They are typically purchased in 7-year increments
  • You pay a penalty if you take the money out early

Drawbacks To Buying A Variable Annuity

  • Unlike all other forms of annuities, there is NO protection of principal against stock market corrections. You get ALL of the gains and ALL of the losses of the underlying funds
  • In addition to an early withdrawal penalty, you also have to pay ongoing fees.
  • The Life Insurance fee alone is typically 1.4% on average IN ADDITION to investment fees and income rider fees.
  • It is not uncommon to pay 3% to 4% per year in fees to own a Variable Annuity
  • There are some Variable Annuities sold through fee-based advisors like me that do not have all these excess fees or surrender charges, but these are the exception to the rule.

Indexed Annuities:

What is an Index?

When you watch the news and they talk about the Dow Jones or the S&P500, those are indexes.

I like to think of them as gauges that we watch to determine the direction and health of the rest of the economy or the associated market.

For example, watching the S&P500 can help you understand how blue-chip stocks are performing as the index is made up of only blue-chip stocks.

What is an Index Annuity?

It is the ability to gain interest in an insurance contract based on the performance of an Index.

But these Annuities are quite unique! How so?

When the index your Annuity is tied to goes up you get the lion’s share of the gains up to a pre-determined limit.

So, let us say the limit is 7% and the index is up 12% you only get 7%.

But what happens when the index loses value? That is where these products really shine.

You do not participate in the losses at all. Let me say that again. You do NOT lose!

If the index loses -20% for the year. You simply start over with all of your principal intact.

How do they work?

  • Your principal is guaranteed by the Insurance Company
  • You get a pre-set guaranteed upside limit based on an index like the S&P every year.
  • You have protection against downward slides in the Index, you do not participate in the losses only in the gains.
  • Your growth is tax-deferred
  • They are typically purchased in 5-year, 7 years, or 10-year increments
  • Indexed annuities can be converted to guaranteed lifetime income
  • You pay a penalty if you take the money out early

Drawbacks To Buying An Indexed Annuity:

  • While Considered A Safe, Conservative option Indexed Annuities are NOT FDIC insured
  • The upside potential of Index gains are limited
  • Longer-term commitments may not always be suitable
  • Early withdrawal penalties

Are Annuities Expensive?

My standard and very accurate answer to that question are compared to what?

Is buying a Mercedes Benz expensive?              

If you could buy one car that could easily last you your entire life and exceed 300,000 miles and keep on running vs. buying a cheaper car and having to replace it 10 times with a newer model every 10 years or so which one was really cheaper?

There are lots of different places you can park your money and all of them have pros and cons and ALL of them have some form of cost.

Some Annuities have ongoing fees, rider fees, expense charges, and early withdrawal fees all wrapped into one product. So YES, some annuities are very expensive.

Other Annuities do not have ANY rider fees, or investment fees, or ongoing fees, or front-end loads but they do require a time commitment. This type is NOT very expensive at all.

It really comes down to what features and benefits are important to you and are you willing to pay to get them?

The important thing is that you work with an advisor that fully discloses all the fees and charges upfront and what they are for BEFORE you purchase, and you should do fine.

Should I Consider Buying An Annuity For Retirement?

 That would depend on your answers to the following questions:

  • Is the safety of your principal important to you?
  • Do you want to potentially outpace inflation with a safe investment?
  • Are you planning on taking out income from your money at some point?
  • Can you afford to suffer market volatility while taking income out?

(if you do not know watch the NEXT VIDEO CLICK HERE)

  • Are you concerned with outliving your money?
  • Is having a guaranteed income for life important to you?
  • Would you like to reduce fees while increasing safety?
  • Do you like the idea of getting a portion of the upside with no downside risk?
  • Do you want to avoid a sequence of returns risk with a portion of your assets?

If you answered YES to any of the above questions then you might want to consider looking into an annuity with a portion of your retirement assets.

If you are even considering an annuity or you are getting close to retirement, please check out my FREE RETIREMENT VIDEO where I explain how to avoid going broke in retirement while securing your nest egg. CLICK HERE


Disclosure: Investment Advisory Services offered through Retirement Wealth Advisors, LLC. (RWA) a Registered Investment Advisor. Rockford Retirement Planning, Inc. (RRP,Inc.) and RWA are not affiliated. Investing involves risk
including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Opinions expressed are subject to change without notice and are not intended as investment
advice or to predict future performance. Past performance does not guarantee future results. Consult your financial professional before making any investment decision.

This information is designed to provide general information on the subjects covered, it is not, however, intended to provide specific legal or tax advice and cannot be used to avoid tax penalties or to promote, market, or recommend any tax plan or arrangement. Please note that RRP,Inc. and its affiliates do not give legal or tax advice. You are encouraged to consult your tax advisor or attorney.

Annuity guarantees rely on the financial strength and claims-paying ability of the issuing insurer. Any references to protection benefits or lifetime income generally refer to fixed insurance products. They do not refer, in any way to securities or investment advisory products or services. Fixed Insurance and Annuity product guarantees are subject to the claims
‐paying ability of the issuing company and are not offered by Retirement Wealth Advisors, LLC.

Social Security/Government Program Disclosure: Antonio Filippone of Rockford Retirement Planning, Inc and Retirement Wealth Advisors, LLC are not affiliated with or endorsed by the Social Security Administration or any other government agency

MDRT Disclosure: The Million Dollar Round Table is a trade association to help insurance brokers and financial advisors establish best business practices and develop ethical and effective ways to increase client interest in financial products, specifically risk-based products like life insurance, disability, and long-term care. Annual qualification requirements include demonstrating a set annual production requirement and agreeing to a code of ethics but are not based on client experience or performance. For more information regarding the Million Dollar Round Table eligibility, please see
https://www.mdrt.org/membership/requirements/. Membership in no way constitutes an endorsement from Million Dollar Round table or any client.

Top of the Table:To qualify for top of the table a member must demonstrate an annual commission of six times the base requirement.

Reviews on third-party websites (Google, Yelp, etc.) for Rockford Retirement Planning may have been provided an incentive of being entered into a raffle in exchange for the review.



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