As a wealth advisor and certified divorce financial analyst with Prosperwell Financial, Nicole Middendorf, CDFA, stays focused on helping people create wealth from the inside out.
Question: I’ve heard a lot of promotions about buying annuities. How do these work, and are they a good idea for my parents to consider as they’re looking at their finances in their senior years?
Answer: I never used to be a fan of annuities, but they can be a great tool to help investors be in the market but also have some protection around the stock market. The other main reason is to help give a set income stream in retirement.
An annuity is a form of contract sold by life insurance companies that guarantees a payment to the “annuitant” (the person who owns the annuity) at some time in the future. This guarantee is based upon the claims-paying ability of the insurance company. There are two main types of annuities: fixed and variable.
The main reason people use annuities is that they grow tax-deferred so you don’t have to pay taxes every single year. I also see people purchasing an annuity striving to preserve their principal or if they want to have a fixed monthly payment. Annuities are designed to help get you a set income stream each month in retirement. Annuities are long-term investment vehicles designed for retirement purposes. Gains from tax-deferred investments are taxable as ordinary income upon withdrawal. Guarantees are based on the claims-paying ability of the issuing company. Withdrawals made prior to age 59 ½ are subject to a 10% IRS penalty tax and surrender charges may apply.
The goal for some is to have Social Security and then an annuity help them meet their basic expenses in retirement.