DEFINING Annuities
Understand the Basics
At TW Retirement Solutions, our goal is to ensure that you have the necessary information to make an informed decision about your retirement.
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Types of Annuities: An Overview

An annuity is a contract between you and your insurance company in which you receive payment at set intervals or on a predetermined schedule. Annuities, primarily used for retirement purposes, provide an income stream and help address the risk of outliving income. Various types of annuities exist, for example – fixed indexed annuities (or FIAs), variable annuities, and fixed annuities. While, there may be recurring income payments available with all of these products, only fixed annuities and FIAs provide protection of your principal. Generally, this fixed term lasts for your entire life. This is why we specialize in these types of annuities. These are products instead of investments. 

Fixed Indexed Annuity: What is It?

A fixed annuity maintains its value over its term and your principal is safe from stock market risk. The agreement is an arrangement between you and an insurance company whereby you make periodic payments and in return, receive regular payouts. These products are mostly used for retirement and assist individuals in making sure that they won’t outlive their money. In this way, a fixed index annuity can ensure you don’t lose your money.

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Two Major Phases of Annuities

An annuity agreement has two main phases: accumulation and distribution. The accumulation phase involves letting your money grow. This phase begins when retirees access and use their funds or when lifetime income begins to be distributed. While the details of each annuity contract will differ depending on the type of contract, these two steps will always apply to FIAs.

Phase 1: Accumulation

In this phase, the individual is saving for retirement. Regardless of the market conditions, fixed index annuities will grow with a set interest rate.  Furthermore, FIAs possibly provide greater returns when the index rises while protecting your principal when the index falls. This accumulation phase allows your money to grow steadily while you leave it in place.

Phase 2: Distribution

The second phase of an annuity contract, called the distribution phase, begins when you start receiving payments from the annuity. There are several ways you can choose to withdraw your income. You can schedule withdrawals to receive payments - monthly, quarterly, or annually. You can even select to receive an income for life. A fixed indexed annuity might allow you to withdraw specific payments annually or monthly without penalty.

Taxes and Annuities 

Your money grows tax-deferred in the first stage of accumulation. It is when you take the money out that you pay taxes. To put it another way, you only pay ordinary income tax when you make a withdrawal. For those who wish to reduce their current tax liability, this can be extremely helpful.

Interested in learning more about different types of annuities?
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