Retirement Planning: 10 Ways Annuities Safely Get Better Than CD Rates
Retirement Planning: 10 Ways Annuities Safely Get Better Than CD Rates
Are you on the investment sidelines because of recent stock market turbulence? That makes sense. However, you might want to rethink the Certificates of Deposit where many parked their money. Their rates are too low if your money has to last you the rest of your life.
The FDIC protects Certificates of Deposits. However, it does not protect the cash from inflation. And the CD's do not assure you will have income for the rest of your life. There is a clear alternative to the low rates of Certificates of Deposit which are also safe due to state regulation. Higher returns from state regulated insurance and annuity companies can assure you get your money back and support you financially for the rest of your years.
Modern annuities provide great security for investment while providing more interest than CDs. State insurance commissioners regulate annuities and testify to their security.
According to the Buyers Guide to Fixed Deferred Annuities published by the National Association of Insurance Commissioners, "Only an annuity can pay an income that can be guaranteed to last as long as you live."
Deferred annuities allow you to safely put your money away to collect interest until you are ready to start taking it out. However, we do not recommend "variable annuities." Their principal can go down if the stock market does. Deferred fixed annuities of different kinds collect interest which can never be taken away from your account. And the companies typically pay significantly more interest than CDs offer.
Here are specific reasons deferred annuities are a better place for money than CDs:
Historical and Well Established Form of Investment: First, annuities were invented as far back as Roman times. They were issued to retired soldiers to assure them an income in old age. Over the centuries annuities were often used by governments to raise money. Benjamin Franklin left annuities for Boston and Philadelphia in his last will. Insurance and annuity companies have been updating annuity designs to meet modern needs. They continue to be safe while offering greater opportunity to earn and collect interest. The option of a guaranteed life income remains in most annuities that gives you income for the rest of your life.
Reserves to Meet Obligations: Second, state rules make the companies and their products very safe. The companies keep required reserves set aside to meet obligations. They are audited to assure compliance with those rules. If a company were to go under, procedures have other companies take on the obligations to you so you do not lose your money in annuities.
Suitability Requirements: Third, states require annuities be sold only to people for whom they are suitable in the first place. In Florida if you are over 65 the insurance regulators require completion of a specific form that gives the information to decide if it is a suitable investment for you. This means you get further help to evaluate the annuity contract and greater assurance it works for your needs and wishes.
Protection from Creditors: Fourth, in some states, including Florida, statutes protect money in an annuity or insurance policy from your creditors. You cannot just shove money in the annuity contract if a lawsuit threatens. However, if your creditor situation is OK, then the annuity contract is a safe place for your money. CDs do not provide this protection.
Income Tax Deferral: Fifth, annuity income is tax deferred. Therefore, your interest can compound in a way that accrues more interest than gathering interest in a CD. The interest earned in a CD is taxable, whether or not you take it out.
Does Not Increase Tax on Social Security: Sixth, if your financial situation is one where more interest from a CD increases the tax you pay on your Social Security check, you should consider an annuity. Tax deferred interest in an annuity does not make that tax higher.
Tax Favored Distributions: Seventh, when you take the money out of an annuity the distributions are treated in an income tax sensitive way. Only the portion of the payment that reflects interest earned on the principal gets taxed. The portion that is the return of your principal is not.
Avoid New Health Care Surtax: Eighth, income in a non qualified annuity is not subject to the new 3.8% surtax that is part of health reform. It is investment income on which that tax is not paid.
Bonuses on Your Premium: Ninth, annuity companies often provide bonus additions to your interest bearing account for signing up. For example, if you deposit $100,000.00 into an annuity with a 10% bonus, the interest additions will be calculated as if you deposited $110,000.00. This increases compounding interest being accumulated in a deferred annuity; therefore, increasing your payouts down the road.
More Interest When Stock Index Goes Up; No Loss When Index Goes Down: Tenth, "Fixed Index Annuities" help you capture more interest if market index(es) you choose go up. The interest adds to your account. It is not taken away if the stock index(es) go back down. This is the best alternative to take advantage of increases that occur in the stock markets without taking any chance of loss if the markets go down. Periodically, you can adjust which stock market index(es) excess interest is calculated with. In that way the opportunity to still plan for market swings to gain extra interest is possible.
But what about "surrender penalties"? We know of no other investment that provides the kinds of benefits and protections annuities do. The deal you make with the annuity and insurance companies is that they will provide the increased benefits listed above if you promise to keep the money in the contract for the agreed term. So, if the potential need to withdraw your money is important other planning is critical. Annuities can still fit, but care is important for funding any real needs you expect. Also, annuity contracts waive penalties for withdrawals for expenses of terminal illness, long-term care and other reasons. Annuity contracts are of different lengths, so "laddering" and other techniques to plan to capture opportunities and assure needed liquidity is possible.
Conclusion: We are not being "safe" if losing money due to low interest rates. Deferred annuities provide similar, and in some ways better safety, while providing more interest than CDs.
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