Money Talks....
Thanks for joining us on this issue of Money Talks…. today we continue our series “You don’t know what you don’t know.” We have been defining terms of things you may have heard of but didn’t know necessarily what they meant. Yesterday we were talking about Traditional 401(k), Roth 401(k), Traditional IRA and Roth IRA. It is never too early or too late to start saving for retirement. If your employer offers a 401(k) by all means participate. For the Traditional 401(k) contribute what you need in order to receive the employer match.
Today we will pick up with Roth IRAs. We will also discuss the different annuities that are available. Not all annuities are created equal
Roth IRA: is a type of individual retirement account (IRA) where contributions are made with after-tax dollars, and the earnings within the account grow tax free. Capital gains are subject to ordinary taxes.
Annuity: is a long term insurance contract where you pay an insurance company to invest your money in exchange for a future income stream. Social Security can be viewed as an annuity. It’s often purchase to generate retirement income, and can provide income for life. You can make a single large payment or payments over time. the money grows tax-deferred until you withdraw it. When you retire, you can receive the money as a lump sum or as regular payments. Provides a steady cash flow for people during their retirement years to alleviate the fear of outliving their assets. There are 4 different types of annuities.
-Immediate Annuity: is a type of financial contract where you make a lump sum payment to an insurance company in exchange for a guaranteed stream of income, often starting immediately or waiting a short period. This income can be for a set period of time or for the rest of your life providing a predictable income source.
-Fixed Annuity: is a financial product with an insurance company that guarantees a fixed interest rate on your investment for a specific period, providing a steady income stream in retirement. It’s essentially a way to lock in a predictable return, backed by the insurance company’s financial stability.
Benefits of a Fixed Annuity: Guaranteed Income: Fixed Annuities offer a predictable income stream, either for a set period or for life which can be helpful for retirement planning. Fixed Interest Rate: The insurance company guarantees a specific interest rate ensuring a steady growth of your investment. Risk Free Growth: Unlike Variable Annuities, which can fluctuate with market performance, fixed annuities offer a safe and predictable way to grow your money. Tax-Deferred Growth: Earnings in a fixed annuity are generally tax deferred, meaning you won’t pay taxes on the growth until you begin payments.
-Fixed Index Annuity: is a long term saving option that combines the security of a fixed annuity with the potential for higher growth tied to a market index like the S&P 500. It offers principal protection, meaning your initial investment is safe even if the market goes down, and the potential for higher returns if the index performs well. think of it as a way to earn interests that’s tied to market performance, without the risk of losing your principal.
How it works: Choose an Index: you select a market index such as the S&P 500 to which your annuity returns will be linked but you are not in the market. Principal Protection: Your initial investment is protected, meaning you cannot lose your principal even if the index declines. Interest Crediting: The annuity credits interest based on the index’s performance, typically over defined period. (ie: a year or several years) Potential for Growth: if the index performs well, your annuity value will increase, and you can potentially earn more than you would with a fixed annuity. Tax-Deferred Growth: The interest earned within the annuity rows tax-deferred, meaning you don’t pay taxes until you start taking withdrawals or income payments.
-Variable Annuity: is a contract with an insurance company where you invest money into subaccounts tied to the market, potentially growing your investment on a tax-deferred basis. the value of the annuity fluctuates based on the performance of the underlying investments, unlike a fixed annuity which guarantees a certain level of returns.
How it works: Investment Subaccounts: Variable annuities offer a range of investments options, including stocks, bonds and money market funds. You can choose how your money is allocated among these subaccounts. Tax-Deferred Growth: Earnings within the annuity grows tax-deferred, meaning you don’t pay taxes on them until you begin receiving payments. Potential for Higher Returns: .The possibility of market gains means variable annuities have the potential for higher returns than fixed annuities, but also carry the risk of market losses.
Optional Riders: Guaranteed Income In Retirement: You can annuitize the annuity value, converting it into a stream of payments that can last a lifetime. Death Benefit: If the owner dies the beneficiaries can receive a death benefit, which may be the greater the account value or a guaranteed win.
Important Consideration: Risk: Variable annuities involve market risk, meaning the value of your investment can fluctuate. Fees: Variable annuities can have various fees including investment management fees, mortality and expense fees and surrender charges. Complexity: Variable annuities are more complex than fixed annuities. So, it’s important to understand the contract and investment options before purchasing. Long-term investment: Variable annuities are generally considered long term investment, and withdrawals may be subject to penalties.
Agents must hold a security license in order to sell a Variable Annuity.
Until next time,
Diane