Tag Archives: Employee Benefit Research Institute

The Pros and Cons of Fixed Annuities

The Pros and Cons of Fixed Annuities

The precarious condition of the U.S. economy and stock market is causing many Americans to lose their confidence in being able to sufficiently fund their retirement years. According to the 2011 Employee Benefit Research Institute study, Americans’ confidence in their ability to afford a comfortable retirement has fallen to a new low. In fact, the percentage of workers who were not at all confident about their financial security in retirement grew from 22% in 2010 to 27% in 2011.

Generally speaking, a chaotic economy will have the largest affect on individuals that have small tolerances to risk and that have a limited time
horizon in front of them, such as individuals about to retire. Since fixed annuities offer stability and the potential for growth, but don’t involve the individual assuming a lot of the risks associated with the financial market, many individuals nearing retirement find them very attractive and valuable. Of course, soon-to-be-retirees aren’t the only investor group that will find the guaranteed stability and returns of a fixed annuity attractive in such an unstable economy.

Like any investment, fixed annuities have both pros and cons. Any consumer considering purchasing a fixed annuity should consider both sides very carefully:

1. Fixed annuities feature guaranteed returns. During the accumulation phase of an annuity contract, the insurer guarantees a minimum rate of return.

2. An unpredictable market is a moot issue for a fixed annuity owner. Market volatility has absolutely no bearing on the rate of return since the insurance company is obligated by contract to meet the minimum rate of returns.

3. An annuity owner will not be taxed on annuity gains until they actually withdraw the money. Other financial vehicles, such as CDs, are taxed based on the interest it earns during the year.

4. Just like with a CD, the consumer can lock a set rate of return in for a set number of years.


1. All of the above pros aren’t without sacrifices being made somewhere. The rate of return will be more conservative than gains from the financial market.

2. It’s more difficult to liquidate fixed annuity assets because they offer a locked-in rate of return. There may also be surrender charges during the surrender of an annuity. Any withdrawal from an annuity will be taxed like regular income. If the funds are withdrawn before the individual reaches 59 1/2-years-old , then the withdrawal could be subject to a federal income tax penalty of ten percent.

When all is said and done, a fixed annuity might not be the best option for those looking to make big money at a big risk. On the other hand, a fixed annuity could be the ideal option for those looking to add stability and modest guaranteed returns to their portfolio. An experienced financial planner or adviser can address any additional concerns or questions.

Call Brian Gruss 509-927-9200

* Annuity withdrawals are generally taxed as ordinary income and may be subject to surrender charges, in addition to a 10% federal income tax penalty if made prior to age 59 1/2. The guarantees and payments of income are contingent on the claims paying ability of the issuing insurance carrier.

Time to Split: Squelch Retirement Worries with a Split-Annuity

Time to Split: Squelch Retirement Worries with a Split-Annuity

Recent research shows that U.S. workers are growing increasingly apprehensive about their ability to fund a comfortable retirement. Only 18% of surveyed workers said they are very confident about having enough money for a comfy retirement, according to the Employee Benefit Research Institute’s 2008 Retirement Confidence Survey.

That means that more than 80% of workers are not certain that they have enough retirement savings. Of course, in the face of skyrocketing health-care costs and burgeoning inflation, it’s really no wonder why workers are so concerned. If you’re worried that you may not have enough income to last a lifetime, you may want to consider a split-annuity strategy. This tactic may allow you to start receiving a steady stream of income now that could continue well into your retirement years.

How to make the split

It’s fairly simple to pull off a split-annuity strategy. All you have to do is divide a lump-sum contribution between an immediate fixed annuity and a deferred fixed annuity. An annuity is a contract between you and an insurance company. You pay the insurance company either a lump sum or a series of payments in exchange for the promise that the company will offer you a stream of income in the future. This allows your money to grow over a specified period of time in a relatively low-risk environment.

The split-annuity strategy is an effective approach for those who need income now and well into the future. That’s because the immediate annuity starts paying you income right away for a specific period of time while the deferred annuity continues to accumulate interest-which will provide you more income in the future.

A case study

Let’s say a man named Bob splits a $500,000 lump sum between an immediate annuity and a deferred annuity-that’s $250,000 in each account. Bob chooses an immediate annuity contract that guarantees a 4% annual rate of return, allowing him to receive an annual payout of $35,000 for the next eight years.

In the meantime, Bob’s $250,000 in the deferred annuity is also earning a 4% annual return on a tax-deferred basis. After eight years, Bob’s immediate annuity has been drained, so he turns to the deferred annuity-which has grown to more than $342,000. Bob can now start collecting income from the deferred annuity.

Important annuity facts

Before you tap into this split-annuity strategy, it’s important to understand all the ins and outs of annuities. Here are a few things you’ll want to keep in mind:

  • Beneficiaries: If you have a deferred annuity and die during the accumulation phase (the time before the payouts begin), your designated beneficiary will collect the principal in addition to any interest that has accumulated. This is why it’s extremely important to designate a beneficiary in your annuity contract.
  • Surrender charges: Although there are some surrender charges associated with withdrawing money from deferred annuities, these charges typically decrease over time. After a certain amount of time, surrender charges will no longer apply.
  • Taxes: Annuity earnings are taxed as ordinary income. Also, if you make any withdrawals before the age of 59ВЅ, you may be subject to a 10% federal income tax penalty.

If you are concerned about having enough income to fund a comfortable retirement, ask your financial advisor about a split-annuity strategy. This effective line of attack may allow you to start collecting income right now and ensure you’ll have enough income well into the future.

* Annuity withdrawals are generally taxed as ordinary income and may be subject to surrender charges, in addition to a 10% federal income tax penalty if made prior to age 59 1/2. The guarantees and payments of income are contingent on the claims paying ability of the issuing insurance carrier.