Comparing Pros And Cons
After running the numbers, the No. 1 advantage of an immediate annuity is that it will provide more income and is guaranteed to continue unchanged for your lifetime, no matter how long you live. The Schwab plan provides less income, and you have a significant risk of running out of money if you live to a very old age. Ill get into the specifics of how much income each type of plan can be expected to generate with three examples below, but lets examine some general pros and cons first.
The Schwab program does have some advantages. With the Schwab program, you retain control over your money and portfolio, unless you eventually exhaust your funds. With an immediate annuity, you turn over your money to an insurance company in exchange for a stream of guaranteed income. This type of annuity typically has no cash withdrawal value.
Schwab also provides more flexibility. You can choose your asset allocation anywhere from conservative, with very little in equities, to aggressive, with a larger percentage in equities. You may also start, stop or change the withdrawal amount.
Additionally, if markets do better than expected, you have the potential for long-term portfolio gains. There also might be some tax benefits via tax-loss harvesting and long-term capital gains. These potential benefits are difficult to quantify, however.
An immediate annuity is less flexible than the Schwab program. You cant start, stop or change the payment amount or term.
How Much Income To Take
You need to carefully plan how much income you can afford to take under pension drawdown, otherwise theres a risk youll run out of money.
This could happen if:
- you live longer than youve planned for
- you take out too much too soon
- your investments dont perform as well as you expect, and you dont adjust the amount you take accordingly.
You can use our calculator to help you think about how much income to take.
How A Financial Or Insurance Sales Person May Pitch This Annuity
Given our longer life expectancy these days, the concern about running out of retirement income is a very real fear. This is one reason why fixed annuities have grown in popularity of late, as they can offer you the assurance of income for the remainder of your lifetime.
Because of that, if you have been presented the USAA Flexible Retirement Annuity by an insurance or financial advisor, then it is very likely that they have focused heavily on such guarantees.
Likewise, insurance and financial professionals will also key in on the fact that your principal will be safe in a fixed annuity, and that you can essentially lock in a set rate of interest for a certain number of years in this case, ten regardless of what occurs in the market, or even in the economy overall.
However, while having these assurances can certainly help you to sleep better at night, the reality is that the interest rates today that are offered on fixed annuity products would have you hard pressed to meet, much less beat, inflation. And this could lead you to struggle financially when trying to keep up with the rising cost of the goods and services that youll need to purchase in the future.
In addition, you really need to weigh the potential loss of financial opportunity for other, more beneficial products, if you have a large chunk of your money locked up in just one annuity for at least a decade.
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What About The Fees On The Flexible Retirement Annuity From Usaa
While there is no up-front sales charge for this annuity, nor an annual administrative fee, dont let that lure you into believing that there are no charges or fees at all. Thats because you could end up incurring various penalties if you need to access more than 10% of your funds from this annuity during the first ten years.
On top of that, any of the interest that you withdraw prior to turning age 59 1/2 will also incur an additional 10% early withdrawal penalty from the IRS.
Immediate Vs Deferred Retirement Annuities
With an immediate annuity, you pay the insurer a lump sum and start collecting regular payments right away. Some older adults, for example, may choose to put some of their nest egg into an annuity once they hit retirement to ensure a regular income stream.
A deferred product, by contrast, is more of a long-term tool. After paying in, you dont collect until a specified date. Before you get to that date, your money has the opportunity to either accrue interest or benefit from market gains .
Theyre complex and hard to understand.
Fees make annuities more expensive than other retirement investments.
Net returns on withdrawals are taxed as ordinary income.
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Do You Still Have Any Questions On The Fra Annuity Did You Notice Any Mistakes In This Review
We know that this annuity review was a tad bit lengthy and for that, we thank you for sticking with us here to the end. But our feeling is that we would much prefer to give our readers a bit too much detail than not enough.So, if you found that this review was beneficial for you, then please do feel free to share it and to forward it on to anybody else that you think may also benefit from it. Also, we know that the details about annuities and other financial products, too can and do change somewhat quickly. With that in mind, if you happened to notice anything in this review that needs to be corrected and/or updated, please let us know that as well, and we will get on the revisions right away.
Are there any other annuities that you would like to see information about?
If you would like to see reviews on any other annuity , our team of annuity geeks will get on the ball and get them on our website. Just simply to let us know which product you are interested in seeing. And, be sure to check back soon.
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P.S If you would like to read more of our USAA annuity reviews here are a link to check out:
How Do I Receive Retirement Income From An Annuity
Annuities generally provide you with more income options than those offered through mutual funds. You can take lump-sum or systematic withdrawals, or select from the following income options:
- Single-life annuity: Offers regular benefit payments for the life of the annuity owner.
- Joint-life annuity: Offers regular benefit payments for the life of the annuity owner and a partner.
- Fixed-period annuity: Pays income for a specified number of years.
- Interest-only payments: Offers regular payments in the amount of the interest that would ordinarily be credited to a retirement annuity.
- Partial annuitization: A strategy through which you annuitize a portion of your account balance to generate income. The balance remains invested until a later date.
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Retirement Annuity Vs Pension Fund
Although retirement annuities and pension funds have a several commonalities, there are also some key differences. For example, both of these vehicles have the ability to pay an ongoing stream of income that the recipient cannot outlive regardless of how long he or she collects on it.
In addition, as of just a few years ago , the retirement annuity can now qualify for the same tax-related incentives as pension funds. In this case, the participant may deduct their contributions into a retirement annuity up to 27.5% of taxable income or gross remuneration whichever is the highest.
It is important to note here that, similar to with Individual Retirement Accounts , an individual is allowed to join more than one RA plan. However, the tax benefits are determined in aggregate. In other words, the deduction limits do not pertain to EACH retirement annuity, but rather to the total amount that one contributes to all of their RAs across the board.
Other similarities between retirement annuities and pension funds include the ability of the RA participants employer to make contributions into the RA on the individuals behalf. The employer may also deduct an unlimited amount of contributions however, those contributions will then be taxed as a fringe benefit to the individual.
Another key difference between retirement annuities and pension funds is that the annuity is a personal retirement savings vehicle, whereby a pension fund is handled through ones employer.
How Does An Annuity Work
An annuity can provide you with a predictable stream of income in retirement. The primary benefits of an annuity include:
Predictable payments: Annuity income payments may be guaranteed for a set period of time or until the end of your life, or the life of your spouse or another beneficiary.
Tax-deferred growth: Money paid into an annuity grows on a tax deferred basis. When you later receive annuity payments, the earnings portion of your payments is taxed as ordinary income, while principal is generally free of tax.
Death benefits: Depending on the type of annuity you choose, a named beneficiary can receive payments after you pass away.
A variety of financial companies sell annuities, including insurance companies, banks and investment brokers. After you sign up for an annuity, you begin by making payments to the company, either as a single lump sum deposit or as regular payments over time. The period when you are contributing into your annuity is called the accumulation phase.
In exchange for payments during the accumulation period, the company promises to make regular income payments to you in the future. The period when you start collecting payments from an annuity is called the distribution phase.
You can choose when you want the payments to begin and how long they should last. You could pick a set number of years, like a 10-year payment period, or guaranteed payments for your entire life. Different terms and costs are involved with varying payout periods.
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How Many Years Does An Annuity Last
For the annuitant, a fixed-period, or period-certain, annuity provides a guarantee of payments for a predetermined amount of time. Ten, fifteen, and twenty years are among the most popular alternatives. There is no guarantee that the annuitant will get a certain amount each month for the rest of his or her life or until all the benefits have been paid out.)
A beneficiary named by the annuitant may receive the annuitants remaining benefits in the event that the annuitant dies before the annuity payments commence. Depending on the plan, this option is available if the full period has not yet expired or if there is a balance in the account at the time of death.
Nevertheless, if the annuitant lives longer than the stipulated period or exhausts the account before passing away, there is no guarantee of subsequent payments. It will continue to pay until the predetermined time period has passed, or the accounts balance hits zero, whichever comes first
Annuities Vs Mutual Funds
The Pennsylvania State University Retirement Plan offers both mutual funds and annuity accounts. What are the basic differences between these two options, and which may be right for you?
To make the right choices for your portfolio, its helpful to understand these investments. When creating your retirement portfolio, you need to consider whether mutual funds, annuity accounts or a combination are right for your savings goals.
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What Is A Flexible Premium Deferred Annuity
If youre thinking of purchasing an annuity for retirement income, know that theyre not all the same. A flexible premium deferred annuity offers a way to buy an annuity, without having to pay a large lump sum premium all at once. Consider the pros and cons as you weigh different annuity options.
Annuity Types By Return
Variable Deferred Annuities
Variable annuities have no guaranteed rate of return. With a variable annuity, you invest in your savings in subaccounts, similar to mutual funds, which hold assets like stocks, bonds and money market accounts.
If the investments you pick do well, your balance grows more and increases your future payout. If your investments underperform, your balance will not grow as much and may even shrink, reducing your future payout.
This potential to lose money you invest means you take on more risk with variable deferred annuities than other types of annuities. But it also opens you up to growing your savings more than you could with any other annuity type.
Fixed Deferred Annuities
In contrast, a fixed deferred annuity is the safest option, often compared to a certificate of deposit . A fixed annuitys interest rate is often much smaller than market returns, but its certain returns ensure you know exactly how much money youll have in retirement. This makes fixed annuities a good choice if you cant take any risk with your future retirement income but want to make sure your savings grow by at least some amount.
Index Deferred Annuities
Index deferred annuities may be the best of both worlds in terms of payment growth. Their returns are based on some market index, like the S& P 500. When the market does well, your money grows more and when the market does poorly, you earn less.
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How Does It Work
A flexible premium deferred annuity requires just a $1,000 payment to get started.
You can make payments to your annuity annually, semi-annually, quarterly or monthly. You can also use our automatic monthly payment plan and well deduct your payment each month from your checking account.
Each payment you make for your annuity will earn an interest rate guaranteed for one year. After that, the interest rate may vary annually, but it won’t fall below a guaranteed minimum.
Considering Risks Of Variable Annuities
While variable annuities have the potential for gain, they also have the potential for loss. When an investor has chosen to have his future income payments tied to the value of the funds, there is the possibility that these payments will vary and may not be enough to cover his retirement needs.
Even though variable annuities are considered securities and regulated by the Securities and Exchange Commission, they do not carry the guarantee of any federal agency, such as the FDIC. They are only as good as the financial strength of the insurance company that sells them. Investors can check the ratings of the insurance companies with Moody’s, Fitch’s and A.M. Best and only deal with the highest rated ones.
Most states have a special annuity fund that provides some protection to investors in the event of the bankruptcy of an issuing insurance company.
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What Is The Max Investments Flexible Plan
- Choose how you want to pay: once-off, regular payments or both
- You have automatic access to leading funds managed by a range of top fund managers in South Africa
- The longer you stay invested, the less you pay in asset plan charges
- Your contributions are tax deductible up to a certain limit
Old Mutual’s Max Investments Flexible PlanMax Investments Flexible Plan?
You have automatic access to leading funds managed by a range of the top fund managers in South Africa. This means that you can, for example, combine an Old Mutual fund, an Allan Gray fund and an Investec fund all in a single Max Investments plan. You benefit from consolidated reporting on the performance of your investments as well as a convenient single point of contact to manage your investments on an ongoing basis.
The Max Investments Retirement Annuity Flexible Investment Plan gives you the freedom to choose to invest via any of the following:
- A once-off investment
Should I Crystallise My Pension
Simply, crystallising your pension is the process of cashing in. You can currently take up to 25% as a tax-free lump sum, then either decide whether you want to buy an annuity or draw an income through drawdown. You can crystallise your pension from the age of 55, but the age you start taking benefits impacts the rest of your retirement.
Buying a lifetime annuity is a way to convert all your pension savings into a retirement income that youll receive for the rest of your life. This is a very inflexible option. Once youve committed to buy annuity you cant later change your mind. A fixed-term annuity does something similar, for a set time . However, a fixed-term annuity may not offer value for money AND you could be left without enough in your pension to choose another annuity or similar options when the fixed-term period is up.
Drawdown is a more flexible option. It allows you greater control of how and when you take your benefits. With drawdown, your funds remain open with the potential for investments to continue to grow and increase your savings. You can also continue to pay in to your pension pot after drawdown however, your allowance of how much you can contribute into your fund during one tax year will decrease from £40,000 to £10,000.
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Get To Grips With Annuities
How does an annuity work?
An annuity will provide a guaranteed, regular and taxable income for the rest of your life. An annuity can provide certainty that youll receive a predictable amount, much like a salary, and it wont run out, no matter how long you live.
How is an annuity calculated?
There are several factors that will affect the income you can receive, including your age, health, where you live and the size of your pension or lump sum.
What happens to your annuity when you die?
Generally, because an annuity is only designed to pay an income to you while youre alive, payments will stop when you die. This does mean that if you dont live for long after buying an annuity you could get back less than you paid for it.
Most annuities have guarantees availiable, through which your dependants will get some money back if you die within an initial period, plus you may have the option to provide for a spouse, partner or other dependant.