187- What Do Ice Cream and Annuities Have in Common?
Written by: Cary Carney, Vice President of Sales at Kuvare, Guaranty Income Life Insurance Company, a Kuvare company.
Today it is our pleasure to welcome a new regular contributor to the Moneysavers blog. Cary Carney has joined us and will be offering his thoughts on annuity products. Cary is Vice President of Sales at the Kuvare company - Guaranty Income Life Insurance Company (GILICO).
He is a recognized leader, with over 20 years of experience in the US annuity industry. Prior to joining GILICO, Cary worked with annuities and life insurance where he held numerous sales and sales management positions with a large fortune 500 financial services company. Welcome Cary!
What if you tasted strawberry ice cream as a child and didn’t like it? You then extended that opinion and decided you didn’t care for ice cream at all. While you weren’t crazy about the taste of strawberry, what about vanilla, chocolate, butter pecan or even birthday cake ice cream? Do you see the problem of generalizing an entire category based on just one type of it? You might be missing out on something wonderful!
Much like the ice cream example, some people generalize annuities into one broad category and base their opinion on one type of annuity. However, if you work with a good financial planner and communicate your financial goals and objectives, you can customize an annuity to provide the right benefits and features to help meet your retirement needs.
Depending on your unique circumstances, the best fixed annuity options can be very simplistic or more complex. A wide range of riders can be attached to a basic annuity to provide the benefits you may need immediately or throughout your retirement years.
Fixed annuities can be as simple as a guaranteed interest rate for a period of one to 10 years, where the contract guarantees a certain interest rate every year compounded annually. Or they can be a bit more complex by adding riders, such as guaranteed income that you or your spouse can’t outlive. If you don’t have a pension plan this can be a great alternative. Another example is long-term care riders that help offset expenses for an event that requires nursing home care, rehabilitation care or even home health care.
Some riders also include death benefits that increase the value of the annuity to the beneficiary in the case of death of the annuitant or owner if the beneficiary takes the death benefit over a period of time rather than a lump-sum payout. Many offer liquidity features that allow for 5% or 10% penalty-free withdrawals each year and, in some cases, even more depending on the policy and annuity purchased.
Fixed annuities are also beneficial because they can defer taxes as the money you place in a fixed annuity as well as the gains aren’t taxed until you take the money out in a lump sum, withdrawal, income or under an annuitization option. Why is this important? Depending on the tax rates when you retire, you could be in a lower bracket than you are today during your working years. Certainly, that isn’t guaranteed, although typically a retired individual has less need for income.
This is also a great opportunity to help offset taxes on your social security through a fixed annuity. Let’s say you invest in an interest-generating account like a certificate of deposit, and you didn’t necessarily immediately need or use the interest it generates. The interest earned contributes to the thresholds that determine if your social security is taxed or not or at what level. Today, if you make between $32,000 and $44,000 annually you may have to pay income tax on up to 50% of your social security benefits. Or, if you earn more than $44,000, up to 85% of your social security benefits may be taxed. By moving that money from the certificate of deposit to a fixed annuity you could potentially earn more interest, AND tax on that interest is deferred until you take it out through surrender, withdrawal, income or annuitization.
If you are in a situation where your interest-bearing accounts are contributing to additional taxes to your Social Security, then a fixed annuity could serve as a potential solution to reduce your tax burden. Consult your tax advisor to help save some of the taxes you may be paying unnecessarily.
Finally, there are also fixed annuities that base the actual return on an external index, such as the S&P 500, rather than offering a declared interest rate upfront. These are called fixed index annuities, and the advantage they offer compared to a declared rate fixed annuity is an opportunity to earn more than a declared rate annuity, depending on the performance of the external index used. With a fixed index annuity your money is not at risk of loss because it isn’t in equities or the S&P 500; rather the annuity is simply based on the performance of an index.
In future blogs, I’ll go into more detail about the differences in fixed annuities, but now it’s time for some ice cream.
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