Arizona Tribune - What You Don't Know About Annuities Can Hurt You

MEDFORD, OR / ACCESS Newswire / May 6, 2025 / Most people are only dimly aware of annuities and how they can help them achieve their financial goals and help ensure they'll have enough income and savings for retirement.

"When you're young, you probably don't need to know much about annuities because they're more germane for people in their 50s and older," says Ken Nuss, CEO of AnnuityAdvantage. "But once you're in that age range, you should know the basics about annuities. They're not for everyone, but if you don't know anything about them, you'll never know if an annuity might be a good choice for you."

Social Security's uncertain future calls for more self-reliance

Social Security faces a tough future as the population ages. "If you're 55 today, your benefits when you turn 75 may be substantially lower than they are today. Furthermore, full retirement age may be delayed from 66 - 67 today to 70 or older," he says.

Additionally, fewer people now have old-fashioned pensions that guarantee lifetime income. Most employers offer 401(k) or similar plans. Such plans, while great, can expose you to investment risk and volatility and may not guarantee income, Nuss says.

"Longevity insurance"guarantees lifetime income

One or more annuities can be part of your self-reliant retirement plan so that you won't run out of money or worry about managing it.

An income annuity is a contract that promises to provide an individual income for a fixed period of years or their lifetime. You deposit your money with an insurance company and in return you get contractual guarantees. Having lifetime income that will keep going at the same level no matter how long you (and, optionally, your spouse) live promotes peace of mind and reduces worry.

"You're creating your own private pension."

Another advantage is that you won't pay any taxes until you start receiving payments. And even then, much of the income will be non-taxable return of premium.

The downside is that you no longer have control over that money. You're relying on the life insurer to keep its promise. For many people, this is a deal very worth taking, but not everyone is comfortable with it. Furthermore, because an income annuity is somewhat inflexible and illiquid, it may not be a good choice if you have little in liquid savings or investments.

"Income annuities are vastly underused, I believe, and many independent experts agree. Last year, sales totaled $18.5 billion, according to LIMRA. This is a small amount when compared to other financial vehicles," Nuss says.

Fixed-rate annuities safely grow savings for retirement

So, on one side of the annuity world, we have annuities that guarantee either future (deferred) income or immediate income. The other half of the annuity universe is made up of various types that are designed to help you grow savings for the future. They can provide interest income too, which you can receive or plow back into the annuity.

A fixed-rate annuity provides a set interest rate for a fixed number of years, plus your principal is guaranteed, much like a bank certificate of deposit (CD). This type of annuity is called a multi-year guaranteed annuity (MYGA). If it's held in a nonqualified account (not in an IRA or Roth IRA), the interest is tax-deferred as long as you reinvest it in the annuity. The interest rate usually beats a CD with the same term.

Fixed-rate annuities are easy to understand and compare because they are largely standardized. However, the details differ, particularly on how much you can withdraw without penalty. Make sure you understand the penalties for excessive withdrawals during the penalty period.

A fixed indexed annuity offers the potential for higher interest earnings, pegged to the performance of a market index, such as the S&P 500, while guaranteeing your principal (which is why it's called "fixed"). It pays a fluctuating interest rate, which can go as low as zero when the stock market declines. Also, there are caps on upside gains.

Over the long term, a fixed indexed annuity stands a good chance of outperforming bonds, CDs and MYGAs. But you have to be able to accept and withstand fluctuating returns. Furthermore, they're complex, so it takes some time and expert guidance to choose the one that best suits you.

Tax advantages abound

"While nonqualified annuities offer tax deferral that can be extended indefinitely, don't buy a deferred annuity if you may need to withdraw the money before age 59½," Nuss advises.

In addition to ordinary income tax on withdrawals of earnings, you'll also pay a 10% IRS penalty tax for withdrawals before 59½ unless you become permanently disabled.

Annuities can be held in qualified accounts (Roth and traditional IRAs) too, and one great choice is the QLAC.

Ken Nuss is the founder and CEO of AnnuityAdvantage, a leading online provider of fixed-rate, fixed-indexed, and lifetime income annuities. Ken is a nationally recognized annuity expert and widely published author. A free rate comparison service with interest rates from dozens of insurers is available at https://www.annuityadvantage.com or by calling (800) 239-0356.

Media Contact: Henry Stimpson, [email protected]

SOURCE: AnnuityAdvantage

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M.White--AT