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Demystifying Annuities: A Comprehensive Guide for Retirees

Today, we are diving into the world of annuities, providing you with a comprehensive understanding of what they are, how they work, and the factors that retirees should consider before buying an Annuity. We'll also explore the different types of annuities, discussing their pros & cons, and what to watch out for.

Part 1: Understanding Annuities:

An annuity, in its simplest form, is a contract between you and an insurance company. In exchange for a lump sum payment or a series of payments, the insurance company guarantees a steady stream of income over a specific period.

For retirees, annuities can be a valuable tool, providing guaranteed income and safeguarding against outliving your savings – a concept known as longevity protection. However, it's crucial to acknowledge that, like any financial product, annuities come with their own set of pros and cons. Thus, comprehending their mechanics and evaluating your unique financial situation is imperative before incorporating annuities into your retirement plan. It's also important to note that not all annuities are created equal.

Annuities work by transferring the risk from you, the annuitant, to the insurance company. During the accumulation phase, you pay premiums to the insurance company, and during the annuitization phase, the insurance company converts your accumulated funds into a stream of income.

Part 2: Types of Annuities:

Single Premium Immediate Annuity (SPIA)

SPIA Annuities are the simplest. You make a lump-sum payment to an insurance company. You then immediately start receiving regular payments from the company. The length of payments can be over a fixed period, the rest of your life, joint life, or a combination of lifetime and guaranteed payouts.

Deferred Income Annuity (DIA)

These are like SPIA annuities except the income payments begin sometime in the future determined by the owner. You would make a payment or multiple payments into the annuity and then delay turning on the income for a set number of years. You may buy DIA’s to hedge against the possibility of outliving other retirement funds. The longer you delay, the higher the payout tends to be.

Multi Year Guaranteed Annuity (MYGA)

MYGA Fixed Annuities offer a fixed interest rate for a predetermined period, often rivaling CDs and government bonds. They come in terms of 1, 2, 3, 5, 7, and 10 years. These annuities are typically favored by conservative investors, especially with recent increases in interest rates.

While these fixed annuities can be a viable option for those seeking guaranteed returns, they come with high surrender fees. This means that if you withdraw more than the allowed amount during the surrender period, you may face penalties as high as 8%.

Additionally, Fixed Annuities offer tax-deferral benefits, meaning you won't be taxed for the interest until you actually withdraw the money from the contract (assuming you are using after-tax funds).

If you decide to buy a Fixed Annuity, please be careful as many of them have a very short 30-day window to get out after the contract ends. If you miss this window, you'll be automatically locked into another contract period for the same number of years, with a high surrender fee of up to 8%.

To avoid this, make sure to check the terms and surrender period before investing. There are plenty of Fixed Annuities that don’t have this 30 day rule. And remember, if you need to access your funds or part of them for expenses, be mindful of the surrender fees and contract terms.

Indexed Annuities (Fixed/Equity Indexed)

These annuities are linked to the performance of a specific stock market index, such as the S&P 500. While they shield your principal from market downturns, they also come with caps and participation rates that limit potential gains. The insurance company can change the cap rate and participation rate each year based on market conditions. This will affect the maximum return you can earn. As a result, the returns from Indexed Annuities over the long-term are closer to bond returns than stock returns. You may see large caps and high participation rates on new indexed annuities, but they may be too good to be true over the life of the annuity.

Variable Annuities

Unlike most other annuities, the risk with Variable Annuities remains with you, not the insurance company. Variable annuity’s function more like stock investments, allowing you to allocate premiums among various sub-accounts akin to mutual funds. They hold the potential for higher returns but also carry higher risk and high fees. Some of these fees include mortality and expense charges, admin. fees, and investment management fees.

Variable Annuities along with Indexed Annuities are often marketed with attractive riders or optional features that can be added for an extra cost and offer guaranteed income regardless of market performance.

One popular rider is the guaranteed lifetime withdrawal benefit (GLWB). It pays you a percentage of your investment for the rest of your life. It is usually somewhere between 3%-5% and is based upon your age. There are others out there as well.

While these riders offer benefits, they also add to the overall cost of the Annuity, impacting your investment returns. It's essential to thoroughly understand all fees, features, and investment options within the Variable Annuity before making a decision.

Should You Buy an Annuity in Retirement? If so, What Kind?

Deciding if and what type of annuity is right for you is a complex question. Too often annuities are sold and not bought. Deciding if an annuity is right for you in retirement hinges on individual financial goals, risk tolerance, risk capacity, and your current financial situation. They can be a suitable addition to a well-planned, long-term retirement strategy. However, they're not a one-size-fits-all solution.

Before you decide to purchase an annuity, it's crucial to have a well-rounded retirement plan in place. Take the time to understand why you're thinking about it, how it functions, the associated fees, and the specific issues it's meant to address. Compare the various types of annuities against alternative options like stocks and bonds to figure out what suits your individual circumstances best.

In conclusion, annuities come in various types, each offering distinct features, benefits, costs, pros, and cons. Choosing the right annuity depends on your individual financial goals, risk tolerance, and overall retirement plan.

Remember, knowledge and a clear understanding of your needs are key to making informed financial decisions. So, take your time to thoroughly understand the product, read the contract carefully, and don't hesitate to ask questions. This is important because once you’ve purchased an annuity, it can difficult, and at times even impossible to get out of. Seeking advice from a fee-only fiduciary financial advisor is a wise step to ensure an unbiased opinion and to confirm that the annuity aligns with your best interests.


The information discussed in this podcast is for general explanations and education only. It is not tax, legal, or investment advice. Before considering acting on any information heard here, first consult with your tax, legal, or investment advisor. Thank you and have a great day.

Learn more about Capital Wealth Group and George Jameson, CFP®, MBA, a Financial Advisor based in Columbia, SC, CLICK HERE!

George can be reached at (803) 250-6464 or

Check out Capital Wealth Group’s Blog Page CLICK HERE!

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