If you are looking forward to have an income while you enjoy your retirement years, you need to look into  investing in annuities

Is my retirement vehicle the right one? This is the question that most people have when they start saving for their retirement.

According to an article in the Wall Street Journal, economists who have researched in the emerging field of “happiness research” have concluded that The Secret to a Happier Retirement is:  Friends, Neighbors, and Fixed Income. An Annuity is the only product that can guarantee a fixed income (other than Social Security or a Pension).

Why an Annuity?

The number one worry of retirees is of them running out of money during their retirement. To remove that worry and that stress, retirees need to have a set income for life, no matter how long you live and this is exactly what an annuity does. No other investment can do that.

What is an Annuity?

An Annuity is an insurance product. It is a contract between you and the insurance company. You invest in an annuity and in turn, the annuity pays out an income after a certain time that you establish at the beginning of your contract. If you want a steady income stream in retirement an annuity is the way to go.

An annuity usually has a death benefit. If you happen to pass away before you receive any annuity payment, your beneficiary will receive a death benefit. The death benefit can be the contract value or it can be the amount of the premiums you have paid so far into the contract.

Annuity Categories

Based on the time that you start receiving payments :

  1. Immediate
  2. Deferred

Based on the type of investment that you choose:

  1. Fixed
  2. Variable
  3. Index (hybrid)

Based on how payouts will be made to you:

  1. Income for guaranteed period
  2. Income for life
  3. Income for life with a guaranteed period certain
  4. Joint and survivor

   Based on the type of payment that you receive:

  1. Monthly
  2. Quarterly
  3. Annually
  4. Lump Sum

When do I Start Receiving Payments?

If you make a Lump Sum Payment, you can choose to receive your payments almost immediately which can be 30 days, 3 months, or a year based on the type of payment cycle that you chose, or you can choose a later date in your life. (immediate or deferred)

If you make regular contributions to an annuity, you will have to choose a later date in your life to let your money grow into that annuity plan. (deferred)

What Type of Investment should I Choose: Fixed, Variable or Index?

Fixed Annuity


 A fixed annuity works like a certificate of deposit because is guaranteeing a minimum rate of return and provides a fixed series of payments that are stipulated in the contract. There will be certain conditions stipulated in the contract, too.

   This has the lowest risk of all annuities. The risk is transferred to the insurance company. They have to invest your money wisely to make sure that they can make the payments to you in the payout phase.

   The insurance companies will invest your money into more secured investments like bonds.

Variable Annuity


If you know how a 401K works, you will know how a variable annuity works. With a variable annuity, your money is invested in different accounts that work like a mutual fund.

   You will not have a guaranteed rate of return, so basically you are bearing all of the risk. If the market tanks, your investment in the annuity will tank along with the market.

   Unlike most 401K’s you do have greater control over your investments, but you are in a contract. The contract will stipulate what you can and what you can’t do with your money and what penalties you will incur.

   We don’t recommend variable annuities for several reasons.  One is the risk. If you don’t see risk as an issue, we believe there are better products than variable annuities that have less risk or have better returns. Two is the fees that variable annuities incur. You will have fees from the investment accounts and fees from the insurance company.

   Also another thing that you need to understand when it comes to a variable product, being an annuity, mutual funds, 401K or any other qualified investment is: The Rate of Return Versus The Real Rate Of Return. If you want to learn about this concept and other financial concepts, sign up to our financial literacy webinar: How To Win At The Game Of Money.  

Index Annuities

   Like an IUL, an index annuity returns are tied to an index. It can be the S&P 500 (the most popular one) or any other type of index. With this type of annuity, you participate in the market but your risk is reduced. Also like an IUL, Index Annuities have a Floor and a Cap rate.

   The Floor rate is the minimum guaranteed rate that your investment will not fall under and the cap rate is the maximum rate that your investment will make. The floor rate can be between 0% and 2%. If the market collapses in the period that the interest rate is being calculated for your annuity, your investment will not participate in the loss. Your investment will stay at the floor rate for that particular period of time. 

   On the other hand with the cap rate, if the market skyrockets, your investment’s rate of return will not go past the cap rate. The usual cap rates can be between 12% to 15%. For example let’s say the index gained 18% then your rate of return for that period will be whatever the cap rate you have.


   Insurance companies are exposing themselves to the risk. Whatever losses they have in the bad years, they have to make up in the good years by adding to their bottom line the difference between the indexes return rate and the cap rate.

   Every business is in the business to make a profit, right? If you are risk averse and are willing to make a lower rate of return than a variable annuity but have a guarantee that you will not lose all of your investment when the market goes belly up, than an index annuity is the best product for you.

   Is this the perfect retirement investment product? If you understand how it works, this is a very good retirement product. In the IUL section, we have made an analogy of an index product to a special blackjack table where you participate in the winning hands but not in the losing hands. Read about it here.

   Would I recommend the Index Annuity over the Fixed Annuity? Well, it depends on a multitude of factors. The most important factor is if you can afford  to have your investment stagnate in the years that the market is down. Will that make a major dent in your lifestyle in the years that the market is down? 

What Type of Payout Should I Choose?

Income for Guaranteed Period also called Fixed Period



   You will choose the amount of years in which you will receive these payments. It can be 10, 15, 20 etc.

   If you pass away, a lump sum will be paid to your beneficiaries or the payments will continue to be made to your beneficiaries.

   The longer the guaranteed period that you choose, the less your monthly payments that you receive will be.

Income For Life also called Life Only

   The payments will be made to you as long as you live. When you die, the payments stop. The insurance company looks at the life expectancy for your group and calculates your payments based on the number of years they expect the average person in your group to live. The longer the group’s life expectancy is, the less your expected payment will be. 

   Basically you bet that you will outlive the people in your group. The group is usually based on your gender, age, location, health history, etc.

   If you are pretty healthy and expect to beat the average life expectancy in your group, this will turn up a winner. On the other hand, if you die sooner than the average life expectancy of your group, this might not be a sound option for your investment.

If you don’t need to leave money to your spouse or other beneficiaries and you are pretty healthy, this is a pretty good option to choose, otherwise stay away from it.

Income For Life with a Guaranteed Period Certain also called Life with Period Certain

   This annuity is similar to life only because the payments are calculated based on your group’s life expectancy and you will get the payments for as long as you live. The difference is that if you pass away before the Guaranteed Period expires, your estate or your beneficiaries will get the payments until that Guaranteed period expires.

   So, for example you get an Income for Life with a Guaranteed Period Certain for 15 Years Annuity. 10 years after you started collecting the payments, you pass away. Your beneficiaries will receive the payments due to you for the next 5 years.

The Guaranteed Period can be 5, 10, 15, or even 20 years. It depends on your age at the time you start collecting and what you qualify for. The longer the period the less your monthly Income for Life payments that you receive will be.

Joint and Survivor Life


   The payments that you will receive will be based not only on your life expectancy but also on your partner’s life expectancy. 

   The payments will keep on coming until both you and your partner pass away. Your beneficiaries will not get anything .

These are the basic types of annuities, but you may encounter new and innovative annuity products that provide a slightly different type. Familiarize yourself with these types and you can hold a smart conversation with your financial adviser. Make sure you read and understand the terms of your annuity and ask as many questions to your financial adviser to make sure that you understand the intricacies of the annuity that you are getting.

What are the Nuts and Bolts of Annuities?

   You will have between 10 and 30 day rescind period for your annuity based on the state that you live in. In the contract this is called a Free Look period. If you don’t understand upfront what you are getting, the 10 to 30 days will go by fast and you will be stuck in a contract that has some penalties to get out of in the first few years of the contract.  

   After the Free Look period, you will be subjected to the surrender charges. 

Of course. You can transfer your investments in qualified funds into an annuity. This is called a Roll Over. There are several advantages to doing so.

  1. With an annuity you are protected against Market Risk. If the market tanks, in an annuity you have transferred the risk to the insurance company. The insurance company is guaranteeing you a certain return of your investment in a fixed annuity. In an Index annuity you have a floor cap that is guaranteeing you will not lose your investment.
  2. With a 401K or other qualified plan you will not be protected against longevity. You will not know how long that money is going to last you in your retirement. With an annuity you can have a set amount of money coming to you monthly for the rest of your life or a set amount of money for a set amount of years, depending on what you choose.
  3. With a 401K, you have minimal control over your funds. You relinquish control to your employer or to your plan sponsor. With an annuity you will have more control over your funds.
  4. If you changed jobs, you might have several qualified plans with different employers. Rolling all plans into a single annuity, will help you manage your money easier.
  5. Management costs for an annuity are lower than for a 401K in most cases.

   Most of the annuities investments are made with after tax money. The annuities are tax deferred. You will not get taxed until you start receiving payments. Then your contribution part of the payment is not taxed but your earning part of the payment is taxed based on the income bracket you fall in at the time you receive payments.

   Unlike 401 K or other qualified plans, there are no limits as to how much you can contribute to an annuity as much as the IRS is concerned. Different companies might have a limit as to the amount of money that you can invest in an annuity with their company but they will not stop you to invest into another annuity with a different company. Some company might limit you at 1 million while others might limit you at 3 million.

   The answer to this question is a resounding YES. That’s why you have to be totally sure about this investment as being a long term investment. Insurance companies think long term when it comes to the investments that they make. They have to compel you to think long term, hence the surrender charge.

   The most used surrender charge is of 7% of your account value if you withdraw money in the first year and it drops 1% for every year after the first until it gets to 0 in the eight year. Different companies might have different surrender charges though. Again, make sure you read the contract.

   Usually, variable annuities have a fee of about 1% to 2% . 

   The fixed annuities or index annuities have very low fees or none. Again, this is something that you will have to make sure of it yourself.  You need to  look it up in your contract.

   Like a 401K or any other qualified plan, most annuities will have a 10% penalty if you withdraw money before you turn 59 ½ years old. This is a tax rule and the 10% penalty will be collected by the IRS. Also you will have to pay taxes on the earnings part of the investment. The contribution part will not be taxed. You will be taxed based on the tax bracket you fall in that year.

   All insurance companies are required to pay into a fund in the state that they do business in, that insures some your investment up to a certain amount that varies from state to state . These are called State Guaranty Associations. Also these State Guarantee Associations will make other companies that are members of the Association, take over the investments of the failing company. This is a very rare occurrence and it happened to only few small insurance companies.

   Before it gets to that though, other insurance companies usually will take over the failing company.

   You should make sure that the company that writes your annuity is financially stable. You can check the company’s financial rating through the Standard and Poor , AM Best or through Moody’s and Fitch ratings. HGI is making sure that the insurance companies we work with have top ratings.

   First of all you have no limit of how much you can put into an annuity, versus the limits that all qualified plans have.

   Second, if you are risk averse and do not want the heartache and stress of seeing your investments plummet, you have the security of a fixed rate return or the possibility of participating in the market through and Index Annuity where your investment is protected by the annuity’s floor rate. With an Index Annuity, in the bad years when the market is taking a beating you will have a very low rate of return or worst case scenario your return will be at zero but your investment will not take the beating along with the rest of the market. Having that peace of mind is very important to a lot of people.

   In the retirement years, most financial advisors recommend that you stop making risky investments anyway, for good reasons. All of the qualified plans carry a lot of risk because they are tied to the market. There is no better investment than the right kind of  annuity, where you reduce the risk.    

   Yes. The insurance companies pay the agents a commission. The insurance companies look at it like a marketing fee. The agent has to market and go through a sales process to show a client the advantages and disadvantages of having an annuity (or any other financial product for that matter) in their retirement portfolio.  Instead of hiring employees, the insurance companies choose to pay commissions to their agents. 

   The commissions to agents are calculated and added to their bottom line. The insurance companies have to invest your money wisely to be able to pay what they have promised you, the client, in the contract and to pay the agents their commissions along with salaries to their employees. In the end, if you are happy with the return that the annuity pays you, do you care about the insurance company’s bottom line? 

  If you understand all of the intricate pieces that compose an annuity and you know how the math works on your favor in the new annuity, then it can be a good idea. If you are comparing only one component like the rate of return for example, then an annuity exchange or a 1035 swap may not sound like a good option.

   You have to look at all of the numbers. First of all you will have a new surrender period. Then you will have to look at the rate of return for a fixed annuity or what are the floor and cap rates for an index annuity. Make sure you understand any potential fee that the new insurance company will charge. Also make sure that the old insurance company doesn’t have any fees if you do a 1035 annuity exchange. 

   Don’t let the agent make the decision for you, he will make a good commission out of this transaction. You should not mind if he makes money out of the transaction as long as you come out better in the long run, but you should be informed about all of the numbers and you have to make sure you will end up with more money in your pocket for your retirement. It is your money and ultimately you are responsible for growing your retirement portfolio as much as you can. 

   We are here to provide financial education first and foremost and that should be the goal of every insurance agent or financial adviser. Unfortunately some get blinded by the commission that they can get and forget that they have a fiduciary responsibility toward you, the client. 

   If you try to hit the market just right with an immediate annuity, you will have to take into account the payments that you will miss while waiting. You will have to watch the 10 year Treasury rates, since most fixed annuities are tied to it. No one has a magic ball to know for sure when the rates will peak. The waiting game can take a long time and you might miss a lot of potential payments.

   Immediate annuities are more about where you are in life and the necessity of finding peace in your investments, not having to worry every day what your investment is doing. With annuities is not about winning in the market, it’s about risk being transfer from you as an investor to the insurance company that will continue investing your money and guaranteeing you a certain return.

   If you are not happy with the rate of return, you can always invest only a part of the whole amount that you want to invest in an annuity, so that you will receive some payments that will keep you afloat until you are ready to invest the rest of the money when the market goes up.  

   You can also look into an index annuity and compare it with the fixed annuity. If you feel comfortable that the market will go back up in the next year or two and you don’t mind a period of stagnation in the market in the long run, an index annuity can be a good product.

   Not everybody needs an annuity. If your social security, pension plan or other retirement investments cover your retirement needs, you might not need an annuity. Just make sure that you and your spouse will not outlive the funds that you put away. 

   An annuity gives you a guaranteed income in your retirement years on top of the other retirement investments you have. If you rely on a big sum of money, instead of regular payments from social security and pension plans, an annuity might be your best bet. Most people can’t handle the big pile of money to make them last for the rest of their lives and will end up in ruin when they are very old and can’t work anymore. Having a set income in your retirement years is the key of having peace of mind and finding happiness in your retirement years.

   An annuity is a good retirement vehicle to add to your social security and pension (if you are one of the few with a pension) plans, if you are risk averse and don’t like to play roulette in a time when the market goes on a see saw, or when you are getting close to the retirement years. 

   With HGI, we have a menu of products that we can recommend to you. If you don’t like annuities, we can offer you an IUL, if you don’t want either one of these options, we can refer you to one off the best active money managers in the country.  All we are trying to do here, is to educate you in financial solutions, so that you can make an educated choice for your financial future.  

To get more information about annuities and a 12 page Buyer’s Guide to Fixed Index Annuities, fill out the following form. Double check your email address.  

Hegemon Group International, LLC. (HGI) is a marketing company offering a vast array of products and services through a network of independent affiliates. HGI does not provide insurance products, real estate, legal or tax advice. In the USA, insurance products offered through Hegemon Financial Group, LLC (HFG); and in California, insurance products offered through Hegemon Insurance Solutions, LLC (California License #0I0198) – collectively HFG. HFG is licensed in all states and the District of Columbia, except Massachusetts. In Canada, insurance products offered through Hegemon Group International of Canada ULC in the provinces in which it is licensed.

Florin Chris Uta is an independent associate of HGI.

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