How To Choose An Annuity That Won’t “Tie Up” Your Money
Once upon a time, there were only two types of annuities: immediate and deferred. An immediate annuity started paying income immediately, under a written contract with an insurance company, usually for life, based upon the person’s age. A deferred annuity was one that allowed you to build up principal inside an interest bearing account. You could then choose the year you wanted to start taking that lifetime income. There were no taxes in the meantime. Back then there were no IRA accounts yet. The process of exchanging a lump sum annuity for a series of payments—in other words the process of giving up access to the lump sum—is known as annuitizing. Back in the old days, the only way to get a lifetime guaranteed income was from an immediate annuity or a deferred annuity that you chose to annuitize.
That was decades ago and is where the idea—and the folklore — that “annuities tie up your money” actually began.
Today, there are four kinds of annuities – immediate, variable, fixed, and fixed index. And while you can choose to exchange your lump sum for lifetime income from any of the four types, a much more popular option has been developed – the living benefit rider, also known by a more common name now: the income rider.
The correctly chosen income rider on a carefully selected deferred annuity, can give you the best of both worlds – staying in control of your lump sum principal and enjoying a contractual lifetime income at the same time. The problem with annuitizing – and with immediate annuities—is that you lose touch with your lump sum. You can’t withdraw it anymore, and most people don’t like that idea. I don’t like idea. Worse yet, its pretty much an irrevocable decision. And most of us don’t like irrevocable decisions. We like to keep our options open, while enjoying exceptional benefits.
So an income rider on a variable or fixed index annuity can give you an either – or way to keep your options open. You can keep your lump sum in position to grow, while at the same locking in a separate lifetime income where you are not required to annuitize — your money is NOT tied up, and your decisions are not irrevocable.
Be careful here, however. There are some forms of variable annuities that DO require annuitization.
While it wasn’t true six or seven years ago, today it is very true that fixed index annuity riders pay more income than variable annuity riders and cost far less. Variable annuities have run into trouble with volatile markets combined with low bond rates. Many variable annuity income riders cost 1.25% to 1.55%. Whereas, many of the top fixed index annuities come with a bonus of five to ten and even twenty percent, and have a rider fee that can be between 0% and 1.2% with higher withdrawal percentages.
Do you currently own an annuity but are unhappy with it — or recently been presented with an annuity but don’t truly understand it? Unfortunately it’s a common problem, but the good news is, its a totally fixable one!
For nearly 20 years, I’ve helped clients navigate their retirements with all forms of investments, including annuities. Annuities require comparison. You wouldn’t buy a house or a car without comparing, so don’t buy any annuity unless you compare growth potential, principal safety, fees, and income guarantees with a fiduciary. Call for your FREE annuity second opinion today, with a licensed fiduciary who has your best interests in mind–legally.