Annuities can be powerful tools to use when creating a retirement strategy. While their most talked-about benefit is guaranteed lifetime income, annuities can play a larger role as part of a holistic retirement strategy.
Five strategies show the potential power of annuities: income tax deferral, complementing an investment strategy, improving retirement outcomes, income tax hedge, and lifetime income.
An annuity can be used to provide beneficial tax treatment. Nonqualified annuities – using money that has already been taxed – will defer income tax on earnings until the earnings are withdrawn from the contract. So, instead of losing a portion of the earnings in taxes every year, the earnings can be retained and exposed to the underlying investments. Through compounding, this will allow money more opportunity to grow before withdrawal.
While investors often rely on equities for growth potential and bonds for protection, an annuity can help complement their overall financial strategy. A registered index-linked annuity (RILA) is designed to give the contract owner the benefit of equity options that have growth potential and a predetermined level of protection. A RILA can help diversify a strategy by offering a balance of performance potential and a level of protection from market downturns.
While diversification helps mitigate risk, it does not guarantee a profit or protect against a loss.
Adding an annuity to a retirement income strategy can help improve financial products’ outcomes. For some people, incorporating an annuity into a portfolio can increase the probability of success in software like eMoney in meeting retirement goals.
By using a Monte Carlo analysis, the software can model a hypothetical scenario for a couple that would like to have $120,000 in income per year after taxes that will last until age 95. In this hypothetical scenario, the couple can increase the probability of achieving their retirement goals from 64% (taking Social Security at age 62 and using a systematic withdrawal plan) to 93% by delaying Social Security until age 70 and adding a registered-index linked annuity with increasing income to their portfolio.
Tax rates will change and likely increase substantially for married clients during retirement. For example, most often one spouse will outlive the other by years if not decades. The surviving spouse will then file as a single taxpayer, rather than as married filing jointly. The tax increase can be substantial, draining assets and reducing available income.
An annuity can offer another stable, possibly increasing, retirement income that is not affected by one of the partners passing. An annuity income payment will not be depleted due to a change in tax status and the loss of Social Security benefits.
Finally, there’s the benefit that most people associate with annuities – lifetime guaranteed income. An income annuity delivers guaranteed income for the length of a person’s life. Depending on the type of income benefit chosen, these products can help mitigate the effects of inflation and protect against some of the risks of market volatility.
Guarantees are backed by the financial strength and claims-paying ability of the issuing insurance company. Variable annuity guarantees do not apply to the performance of the variable subaccounts, which will fluctuate with market conditions.
Products are issued by Allianz Life Insurance Company of North America. Registered index-linked annuities (RILAs) are distributed by its affiliate, Allianz Life Financial Services, LLC, member FINRA, 5701 Golden Hills Drive, Minneapolis, MN 55416-1297. 800.542.5427 www.allianzlife.com
This content does not apply in the state of New York.
For financial professional use only – not for use with the public.
