The servicemembers’ guide to annuities
An annuity is a type of investment product that can generate regular income for you and your spouse after retirement. Like a 401(k) or TSP savings, annuities are tax-advantaged, meaning you won’t have to pay taxes on earnings until you begin to withdraw funds. Many annuities offer competitive interest rates and some can provide a guaranteed stream of income, no matter how long you live.
Sounds great, right?
As with all investments, annuities are a good choice for the right person. You have several different types of annuities to choose from, and choosing the right one for you depends your current situation and your retirement goals. Use this quick guide to get a better understanding of annuities before sitting down to talk with a financial advisor.
4 Common Types of Annuities
1. Fixed Annuity
Fixed annuities are the most conservative annuity option. They are a contract with an insurance company which establishes a guaranteed (or fixed) range of interest that the insurance company will pay the annuitant for the life of the contract. Typically the interest rate adjusts annually, within the contracted range, according to current market interest rates.
Advantages
- Tax-deferred growth
- Compound growth without the anxiety associated with market fluctuations
- Most fixed annuities offer options like guaranteed income or lifetime income for you and spouse
Drawbacks
- Annuities with longer surrender periods tend to yield higher interest rates, but you may not want to tie your money up for an extended period
- Early withdrawal (withdrawing from a fixed annuity before age 59 1/2) results in a federal penalty
2. Variable Annuity
As the name suggests, the return on a variable annuity investment varies according to the performance of the underlying investments.
Advantages
- Tax-deferred growth
- Principal protection options that limit potential losses
- Optional income riders that guarantee lifetime income streams
Drawbacks
- Additional costs associated with principal protection and income riders make the cost typically 3% or more a year.
- Early withdrawal (withdrawing before age 59 1/2) results in a federal penalty
- Very complex in nature and can be difficult to understand without the help of a professional financial advisor
- Optional income riders can be subject to specific age restrictions and income limitations that should be evaluated before electing these features.
3. Indexed Annuity
An indexed annuity features an interest rate that depends on one or more equity indexes, such as the S&P 500 or the NASDAQ.
Advantages
- Tax-deferred growth
- Optional “participation” and “cap” rates allow you to limit your risk and maximize gains
- Optional income riders that guarantee lifetime income streams
Drawbacks
- Very complex in nature and can be difficult to understand without the help of a professional financial advisor
- Early withdrawal (withdrawing before age 59 1/2) results in a federal penalty
- Optional income riders can be subject to specific age restrictions and income limitations that should be evaluated before electing these features.
- Can have a lengthy surrender charge period.
4. Immediate Annuity
These annuities pay out immediately and are relatively straightforward: you pay a lump sum for the annuity and receive fixed monthly income payments for a set duration.
Advantages
- Highly customizable income duration options
- Single life or joint lives coverage
- Cost-of-living riders can adjust monthly payments to meet future inflation rates
Drawbacks
- Interest rates for immediate annuities are usually locked
- Limited investment flexibility
- This type of annuity may be best suited for people who have already retired
The Bottom Line
For those who stay the course, annuities can provide tax advantages and a steady stream of income after you retire. However, investors who need to withdraw early can suffer tax penalties and surrender charges. Talk to a qualified Financial Advisor to help you decide which option is best for your long-term financial security.
DISCLAIMER: Guarantee depends on the claims-paying ability of the issuing insurance company and does not apply to the investment return or principal value of the separate account. Before buying an annuity, you should find out about the particular annuity you are considering. If considering the purchase of a variable annuity, request a prospectus from your Financial Advisor and read it carefully. The prospectus contains important information about the annuity contract, including fees and charges, investment options, death benefits and annuity payment options.
©2015. First Command Financial Services, Inc. parent of First Command Financial Planning, Inc. (Member SIPC, FINRA), First Command Advisory Services, Inc., First Command Insurance Services, Inc. and First Command Bank. Securities and brokerage services are offered by First Command Financial Planning, Inc., a broker-dealer. Financial planning and investment advisory services are offered by First Command Advisory Services, Inc., an investment adviser.
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