- An annuity can augment your other sources of income in retirement.
- Annuities are designed to offer you protection, tax deferral and guaranteed income.
- We can help dispel three common myths about these product-based solutions.
With people living longer and experiencing volatility in stock markets, annuities may be right for some in helping to supplement other sources of guaranteed and stable retirement income—such as Social Security or a pension. These product-based solutions are essentially long-term investment vehicles that provide guaranteed income for life, helping you cover essential expenses such as home, utilities, food and transportation.
Annuities are not right for everyone, however, and as a result, myths persist. We asked Lynn Abbott, Vice President of National Sales and Funds Management at RiverSource, to dispel the three most common ones.
Myth: Annuities are only for retirees
Fact: An individual who has reached the maximum contribution limits for a 401(k) plan or other employer-sponsored retirement savings plan can explore annuities as a possible solution, because there are no annual or lifetime investment limits. Variable annuities generally offer tax-deferred accumulation (i.e., you don’t pay taxes until you receive annuity distributions).
“If you’re in your mid- to late-40s, you have time to grow your investment portfolio without paying income taxes during that period,” Abbott says. “This can help you accumulate more funds in the annuity before you retire. You can also mitigate risks with an optional benefit for additional cost that protects your original investment while accumulating for retirement.”
"Those who have maxed out their contributions to 401(k) plans or other tax-deferred vehicles are turning to non-qualified annuities as another way to save for retirement without taxes cutting into growth.”
Myth: Your money won’t grow
Fact: With a variable annuity—whose rate of return changes along with the market —you have the potential to grow your retirement portfolio over time. This makes it a valuable long-term investment tool for those who can tolerate fluctuations in portfolio value as the markets move up and down.
Alternatively, a fixed annuity may be appropriate if you have a shorter accumulation timeframe or want the stability of a more predictable rate of return that isn’t fluctuating with the market. “For clients with a low risk tolerance, a fixed annuity can be a good choice because it offers a guaranteed minimum interest rate,” Abbott says. “It can also protect your original principle that you’ve worked hard to earn.”
Regardless of whether you’re considering a fixed or variable annuity, guarantees associated with them are based on the issuing company’s continued ability to pay claims. Investment returns associated with variable annuities in particular are subject to the performance of variable subaccounts, which vary based on market conditions.
Annuity distributions of non-qualified earnings1 are taxed as ordinary income when they’re withdrawn, similar to an individual retirement account (IRA) or 401(k) account. “A frequent question is whether the taxation is worth the benefit of tax deferral, versus paying the currently lower long-term capital gains tax,” Abbott says. “The answer is that it depends on your individual situation—in some cases, it may be. Your Ameriprise financial advisor can work with your tax advisor on the best approach for your situation.”
Myth: The fees aren’t worth it
Fact: Investors who experienced the 2008 financial crisis are concerned about future market volatility, and as a result, they may be willing to pay a fee for steady, reliable income no matter what is happening in the market.
With a variable annuity, you will pay a mortality and expense (M&E) fee, which helps cover the guarantees the annuity provides. Variable-annuity investors also pay underlying fund expenses and, in some cases, an annual contract charge. A surrender charge may apply to withdrawals during the surrender-charge periods.
“Another way to think about annuity fees is to remember that you continue insuring your home even after you pay off the mortgage,” Abbott says. “For many, retirement savings exceed the value of their home, so insuring your income-generating assets can make a lot of sense.”
Depending on your financial situation and goals, annuities can be excellent tools to help you be financially prepared for retirement—if they are appropriate considering your situation. “Your Ameriprise advisor can help determine if an annuity is right for you and will recommend the level of funding needed to provide you with income for essential expenses,” Abbott says. “Working with your advisor to invest your other savings can help you keep up with inflation and achieve your goals.” Keep in mind, there is no guarantee that an annuity solution or optional riders purchased will keep up with inflation.
Talk to us
To find out whether an annuity may be right for you, consult your Ameriprise financial advisor.