Annuities are built to guarantee income for life. That's their entire purpose. They work like a private pension, replacing the certainty that previous generations had with their retirement. The tax-advantaged annuities we use address several specific risks:
- Longevity risk: What happens if you run out of money in retirement? Annuities guarantee income for life, so that doesn't happen.
- Market risk: What happens when the market completely tanks? We take the market out of the equation.
- Sequence of returns risk: When you take your losses versus when you get your gains becomes a major factor in how long your money lasts. By addressing market risk, we're also addressing sequence of returns risk in the process.
- Legislative risk and taxation risk: Those in Washington or your state legislature can raise your taxes whenever they want, affecting your retirement income negatively. We use strategic Roth conversions within annuities to keep taxes low while spreading those taxes out in a manageable way, addressing the Social Security taxation rules in the process.
Common Questions
What is an annuity?
Simply put, an annuity is a contract with an insurance company. You put money in, and in return they pay you income, often for the rest of your life. Think of it like building your own pension. You trade a lump sum one time for an ongoing paycheck you can't outlive.
Are annuities good or bad?
Despite what you may have read on the internet, annuities are just financial tools. Like with any tool, its effectiveness is based on how it's used. A great annuity product can be a bad decision if it doesn't make sense for a person's financial goals. Annuities aren't always a good fit, and they aren't always a bad one, either. Anyone with a bias on one side or another about them either doesn't understand how they work, or isn't looking out for your best interest.
Can you lose money in an annuity?
I avoid annuities that have high fees and I don't use annuities that can lose money in the market. I treat them as a tool for folks that are either concerned about running out of income in retirement or want to mitigate the risk of market loss. So yes, you can have an annuity that can lose money or will cost a lot in fees, but it won't be from an annuity you got from me.
How is annuity income taxed?
It depends on the type of money we put into the annuity. Tax-deferred dollars are taxed when they're distributed as income or withdrawals. When you put in after-tax dollars (such as money from a CD), it will be taxed on what we call an "exclusion ratio," where the portion that's a return of your original money comes back tax-free, and only the growth above that gets taxed. If you fund an annuity with Roth dollars, or if you use our Strategic Roth Conversion Strategy, then you'll enjoy that income tax-free. As always, the ultimate authority on any of this is your CPA, and we'll be happy to loop them in on any plans we put together for you.
Why do annuities get a bad reputation?
Here's some "inside baseball" for you: some financial advisors sell annuities for the commission, and then you'll never hear from them again. That's not how we work. The commission an insurance carrier pays is meant to buy my time and service to you for as long as you have that policy. A commission isn't payment for selling a product. It's payment for servicing you and your policy for the life of it. So just remember, "as long as you have it, you have Kit."
Insurance products are not FDIC insured, are not bank guaranteed, and may lose value. Insurance products are not deposits or obligations of any bank and are not guaranteed by any bank or bank affiliate.
The information provided is for educational purposes only and should not be construed as legal, tax, or investment advice. Please consult with qualified professionals regarding your specific situation.
See if an annuity fits your situation.
It's free to have that first conversation, and you'll walk away knowing more about your situation than you did when you came in.