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Annuities can boost retirement income

April 13, 2014
By SAMUEL ZIMMERMAN , The Leader Herald

Building a steady stream of retirement income is a top priority for many Americans, especially those nearing their anticipated retirement date. With life spans extending into the 80s, 90s and even into the 100s, there is even more reason for investors to ensure they'll have a source of income that lasts a long time.

One way to help meet that need may be an annuity. An annuity is a contract between you and an insurance company that is designed to help meet retirement and other long-range goals, under which you make a lump-sum payment or series of payments. In return, the insurer agrees to make periodic payments to you beginning right away (an immediate annuity) or at some future date (a deferred annuity).

While there are many different types of annuities, there are a number of commonalities:

There are no annual contribution limits to an annuity as there are in IRAs or 401(k)s, unless the annuity is held in a qualified account. The issuing insurance company may however impose contribution limits.

All contributions-and any earnings-grow tax-deferred until withdrawal. Note, however, that annuities do not provide additional tax deferral on qualified contracts.

Annuities offer a wide range of underlying investment options, from very conservative to very aggressive.

Whether an annuity is right for you may depend on how much you anticipate receiving from traditional sources of retirement income, such as Social Security, a 401(k) or an employer pension. You have a choice of annuities:

A fixed annuity, which provides a fixed rate of return for a specified time period.

A variable annuity, which provides a variable rate of return based on the underlying investments.

An equity-indexed annuity, which offers a guaranteed rate of return that may increase depending on the index it is tied to.

Fixed annuities

As their name suggests, fixed annuities typically present a guaranteed interest rate that is locked in for an initial period (typically 1 to 15 years) and may be adjusted thereafter, often annually. With a fixed annuity, you have no control over the investments-the issuing insurance company decides how to invest your assets, primarily in government securities and high-grade corporate bonds. There are two basic types of fixed annuities:

The Guaranteed Return Annuity offers a guarantee that you can never receive less than 100 percent of your investment-no penalties or fluctuations in the interest rate market can impact your principal should you surrender.

The Market Value Adjustment annuity works much like the GRA, but there is no guarantee of your principal if rates rise and you surrender your contract. MVAs often pay more than a GRA due to the increased short-term risk of rising interest rates.

Earnings accumulate tax-deferred and are not taxable until they are withdrawn, when they are taxed as ordinary income. Withdrawal options may include a lump sum or a lifetime stream of income.

Variable annuities

This type of annuity, in contrast, generates investment returns that fluctuate depending on how the underlying subaccounts are invested. Generally, you may make an investment selection that may include stock, bond, cash subaccounts or some combination of these. Available choices range from conservative-such as money market, guaranteed fixed accounts and government bond funds-to more aggressive-such as small cap, mid cap, large cap, capital appreciation, aggressive growth and emerging market investments. As with many investments, the value-and payout-of a variable annuity will change depending on the performance of the subaccounts you choose. Withdrawals are taxed as ordinary income.

This column was provided by Samuel Zimmerman, a financial adviser with Morgan Stanley Smith Barney LLC in Gloversville. The Leader-Herald invites area financial advisers to submit columns. For information on how to submit one, call Tim Fonda, managing editor, at 725-8616, Ext. 277.



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