Annuities 101

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Every episode we focus on specific topics , questions that people often share and have in common in the financial world , and today's episode is around the topic of annuities . You may have heard of them before , maybe you haven't . We'll talk a little bit about them today . So what is an annuity ? How do they work ? Is it the right investment vehicle for me ?

We will begin to uncover some of these answers today . So running out of money remains a top concern for retirees . According to a recent survey , only 40% of Americans feel confident about their retirement savings .

When working with a client on their retirement planning , there are a few things that can be really beneficial to solving their biggest concern running out of money . What is one way retirees can supplement their retirement income ?

Well , there are several ways , but one of those ways is a pension , and some annuities have the potential to be utilized as a pension style investment . The greater predictable income that a retiree has , the less pressure it puts on the rest of their assets .

So , naturally , if a person has a healthy amount of income from various assets that they can count on , plus social security benefits , there's certainly less pressure on the rest of their financial assets 401ks , iras , roth IRAs in order to fill a large portion of the supplemental income .

The greater the amount of predictable income an investor has , the more flexibility they will have to utilize other investments , like stocks and bonds , more strategically . Unfortunately , pensions are no longer the norm . According to the Bureau of Labor Statistics , 84% of full-time workers had pensions in 1981 .

In 2022 , only 15% of private industry workers had access to a defined benefit plan . So , knowing such a large number of retirees do not have a workplace pension , what is a possible solution ? Well , annuities have increasingly become an important ingredient to the retirement recipe because they offer retirees asset protection and predictable income .

Annuities can be used to achieve multiple strategic objectives , and there are different types of annuities and annuity plans from many different companies that offer them . Let's talk a little bit about what an annuity is .

An annuity is an insurance-based financial product designed to accept funds by an individual , by an investor , which will be paid back to that individual at a later date , in either a stream of income payments or as a lump sum .

It is the contract or promise with the insurance company to take in payments over a period of time or in a lump sum until a certain event occurs . Now that event could be .

A certain amount of time has passed , a certain age has been reached or death , when the company pays it back at a certain rate or all at once for a predetermined period of time , including for life or lifetime payments . Now this may seem complicated , but the general concept is pretty simple .

You place money with an insurance company in exchange for an income stream for a specific period of time or for life that grows at either a fixed rate or changing rate , depending on the type of annuity . While annuities can be a cornerstone of your retirement plan , it's important to know how one might work and how it might be best fit for you .

The more informed you are about your choices , the better prepared you will be to make the most prudent decision . There are pros and cons to almost every investment vehicle and it's important to know those up front before making a final decision . We always want to take into consideration each person's individual situation , since everyone's portfolio needs are different .

Needs are different . It's important to be educated on annuities , to understand your options , to understand how they work , understand the benefits , the drawbacks and everything in between before adding an annuity to your financial plan . You want to select a company with a high rating by an independent rating agency like Standard Poor's or Moody's .

So what are some benefits that annuities include ? Well , annuities have some benefits , such as tax benefits . While the annuity deposits aren't tax deductible , you don't have to pay taxes on the growth and on the earnings until you begin taking withdrawals , so the tax deferral can have quite an effect on the growth of an investment .

Another benefit is payment options , right ? These certain payment options can help supplement social security and other income streams , right ? We talked about either , you know , obviously a lump sum , but a more common option is a stream of income over a period of time or lifetime payments . Another benefit is risk mitigation .

So , if we're looking at a whole comprehensive portfolio and we're taking a small portion and positioning it into an annuity , well , that effectively mitigates some of the risk that would normally be experienced in the markets in terms of volatility . Now , annuities might not be right for everyone .

So what are some of the drawbacks or things to consider before purchasing an annuity ? Well , annuities are generally long-term products and a lot of times they have a penalty for surrendering early .

So the terms can be different depending on which company , depending on which product , but it's important to understand that timeframe If there's a potential need for all of the money or all those funds to be surrendered before that term is up . Another thing is the rate of return .

The rate of return could be lower than what may be earned in a strong stock market . Another thing is payments . So you know this can be set up like a pension , but this generally does not increase payments . There are no cost of living adjustments to outpace inflation or keep up with inflation , so it's one thing to keep in mind .

The last thing is complicated contracts . Some of these contracts can be very complicated and very in-depth . So it's important to partner with somebody who understands each product , understands each company and can help break down the contracts and make it easily digestible so that you can understand and making the right decision for you and your situation .

Lastly , fees A lot of times you want to make sure and your situation . Lastly , fees A lot of times you want to make sure that you're aware of any fees . If you're paying a fee for some type of writer or some feature , you want to make sure you understand what that fee is and what you're getting in return .

Despite any negative press on annuities there are good annuities just as there are bad ones . It's also important to note that an annuity would likely never be your only source of retirement income . An annuity should work together with your other retirement assets as part of an overall comprehensive financial plan .

So you might be asking yourself how do I know if an annuity is right for me ? We just talked about some of the pros and cons of annuities and there's certainly a lot to consider . So what questions can you , as listeners , ask yourselves when considering an annuity ? Do you have concerns about running out of money in retirement ?

How much monthly income do you need to maintain your desired retirement lifestyle once your paycheck stops , once your salary stops ? Do you understand your risk tolerance and are you currently taking on too much investment risk ? Are you currently working with an independent fiduciary who is legally and morally obligated to act in your best interests ?

So how does Bowman Wealth Group typically put an annuity to use in someone's portfolio , if it's a fit . As the saying goes , if you don't have a plan , you're planning to fail . This is an old adage . That's true for a lot of things , but certainly true when it comes time for retirement .

In terms of a comprehensive financial plan , it almost again should never be someone's full portfolio , but as a portion of a portfolio in order to remove a large degree of the market volatility . This would be one way to take a small portion off of the volatility table , so to speak , that the markets would normally expose funds to .

It is always important to look at everything as a whole at a high level , to make sure that each part of the portfolio is playing its respective role properly and fits in with the overall plan , and that's essentially how we at Bowman Wealth Group utilize annuities if it makes sense .

Now , this has been obviously a very quick run through of annuities and this is just scratching the surface . As I mentioned , these can get complicated and not all annuities are created equal .

There are many different components , many different features , different annuities , different types of annuities , and we can certainly dig into that in another episode as we dive deeper into annuity features , additional riders and things that may set annuities , and we can certainly dig into that in another episode as we dive deeper into annuity features , additional riders and

things that may set annuities apart from others . So , as always , I want to thank you guys so much for listening . If anything you heard resonated with you today , you want to dig deeper into anything in particular , you want to see if this fits your situation or not , feel free to reach out to us at that email address .

Again , that email is ask at Bowman wealthcom . Special thanks to our listeners and subscribers . If you are new to our podcast , give us a follow . Keep an eye out for future episodes . We appreciate all the support from you guys . Join us next time on your financial compass . This has been your host , marcos Lemus with Bowman Wealth Group . Take care .

This requires a review of an investor's objective , risk tolerance and time horizons . Investing always involves risk and possible loss of capital . Opinions expressed are solely those of Bowman Wealth Group and our editorial staff .

The information contained in this material has been derived from sources believed to be reliable , but does not guarantee accuracy and completeness and does not report to be a complete analysis of the materials discussed . Any references to protection benefit or lifetime income generally refer to fixed insurance products , never securities or investment products .

Insurance and annuity product guarantees are backed by the financial strength and claims paying ability of the issuing insurance company . An annuity is intended to be a long-term tax-deferred retirement vehicle . Earnings are taxable as ordinary income when distributed and if withdrawn before age 59 and a half , may be subject to a 10% federal tax penalty .

If the annuity will fund an IRA or other tax-qualified plan , the tax deferral feature offers no additional value . Qualified distributions from a Roth IRA are generally excluded from gross income , but taxes and penalties may apply to non-qualified distributions . Consult a tax advisor for specific information .

This is not a recommendation to surrender or otherwise purchase an insurance product . You should review your specific policy and financial situation with your advisor .

Any statements or opinions expressed should in no way be construed or interpreted as a solicitation to sell or offer to sell advisory services to any residents of any state other than the states where otherwise legally permitted . Advisory services are offered through Chris Bullman Inc . Dba . Bullman Wealth Group .

Registration as an investment advisor does not imply a certain level of skill or training . Insurance products and services are offered and sold through Chris Bowman Inc . Dba . Bwg Insurance Agency .