Are you seeking a reliable source of income to enjoy your retirement years? Look no further than annuities – a smart investment option.


According to economists specializing in “happiness research” as cited in the Wall Street Journal, the secret to a happier retirement lies in friends, neighbors, and fixed income. Annuities are the only products that can guarantee a fixed income, apart from Social Security or a pension.

Is your retirement plan truly the right fit for you? This is a common question when saving for retirement.

Why Choose Annuities?

The top concern for retirees is the fear of running out of money during their retirement. To alleviate this worry and reduce stress, retirees need a consistent income for life, regardless of their lifespan. An annuity is designed to provide just that, making it a unique investment option that offers unmatched security.

If you prefer a low-risk approach to retirement savings, annuities are the ideal product for you. On this page, we’ve created a comprehensive guide explaining how annuities work.

Understanding Annuities

An annuity is an insurance product that establishes a contract between you and an insurance company. By investing in an annuity, you secure a regular income payout after a predetermined period of time. If you desire a steady income stream during retirement, an annuity is the perfect choice.

Additionally, annuities often include a death benefit. In the unfortunate event of your passing before receiving any annuity payments, your beneficiary will receive a death benefit. The amount can either be the contract value or the total premiums paid, depending on the annuity type you select.

Categories of Annuities

Annuities can be categorized based on when payments start, the type of investment chosen, the payout structure, and the frequency of payments:

Based on when payment start:

  a. Immediate

  b. Deferred

Based on investment type:

   a. Fixed

   b. Variable

   c. Index (hybrid)

Based on payout structure:

   a. Income for a guaranteed period

   b. Income for life

   c. Income for life with a guaranteed period certain

   d. Joint and survivor

Based on payment frequency:

   a. Monthly

   b. Quarterly

   c. Annually

   d. Lump Sum

When Will I Start Receiving Payments?

If you make a lump sum payment, you can choose to start receiving payments almost immediately, typically within 30 days, or you can choose 3 months, or even a year based on the payment cycle you select. Alternatively, you can opt for a later date in your life (immediate vs. deferred).

For regular contributions to an annuity, you’ll need to select a later date for your money to grow within the annuity plan (deferred).

Choosing the Right Investment: Fixed, Variable, or Index?

Fixed Annuity


Similar to a certificate of deposit (CD) but with a higher rate of return, a fixed annuity guarantees a minimum rate of return. It provides fixed payments stipulated in the contract.

Because the risk is transferred to the insurance company, they invest your money wisely to ensure timely payouts. Typically, they invest in secure options like bonds

Variable Annuity

Understanding the workings of a variable annuity is similar to understanding a 401(k) plan. In a variable annuity, your funds are invested in the market, much like a mutual fund. However, it’s important to note that variable annuities may have higher fees compared to mutual funds.

When you invest in a variable annuity, there is no guaranteed rate of return, and you assume all the associated risks. If the market experiences a downturn, your annuity’s value will also decline.

While variable annuities provide greater control over your investments compared to most 401(k) plans, it’s essential to remember that you are bound by a contract. The contract will outline the restrictions on how you can use your funds and the penalties you may face.

We generally do not recommend variable annuities for several reasons. Firstly, they carry inherent risks. If you are not comfortable with the level of risk involved, we believe there are alternative products that offer lower risk or better returns. Secondly, variable annuities come with fees from both the investment accounts and the insurance company.

It’s also crucial to understand the concept of the Rate of Return versus the Real Rate of Return when considering variable products like annuities, mutual funds, 401(k) plans, or other qualified investments. To gain insights into this concept and other financial topics, we invite you to sign up for our financial literacy webinar: “How To Win At The Game Of Money.” Our webinar covers valuable information that may not be commonly known unless you have studied finance extensively or delved into numerous financial books.

Index Annuities

Index annuities, similar to Index Universal Life Insurance (IUL), are tied to an index for their returns. The most popular index used is the S&P 500, but other indexes are also applicable. These annuities allow you to participate in the market while reducing your risk. Like IULs, index annuities have a Floor and a Cap rate.

The Floor rate represents the minimum guaranteed rate that your investment will not fall below. If the market experiences a significant downturn during the calculation period, your annuity will not participate in the loss. Instead, it will maintain the floor rate for that specific time frame.

For example, let’s consider the 2008 financial crisis when the market plummeted by 49%. If you held an Index Annuity during that period, you would be grateful to the agent who sold it to you since you wouldn’t have suffered any losses like many of your friends who invested directly in the market. Your return for that year would be the floor rate. While you might not gain from your investment, you are assured of avoiding losses.

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%. There are annuity programs that will allow for a higher cap rate, but 12% to 15% is the usual. 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, let’s say 14%, not the full 18%.

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

On the other hand, the cap rate limits your investment’s rate of return when the market experiences significant growth. Typically ranging between 12% to 15%, the cap rate determines the maximum return your investment can achieve. For instance, if the index gains 18%, but your cap rate is set at 14%, your rate of return for that period will be capped at 14% rather than the full 18%.

Insurance companies take on the risk associated with index annuities. They need to offset any losses incurred during unfavorable market conditions by leveraging the difference between the index’s return rate and the cap rate, thus bolstering their financial standing.

Some individuals may not prefer the idea of a cap rate, as it may feel like they are missing out on potential gains. However, the peace of mind of knowing that their investments are protected during downturns often contributes to their overall happiness. Additionally, historical data shows that index returns rarely exceed the 12% to 15% cap rate most insurance companies offer.

Is this the perfect retirement investment product? This is a very good retirement product if you understand how it works. 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. If you look at the history of the market, whenever the market goes into negative, it has stayed there for no more than 2 to 3 years. You will have to ask yourself if your lifestyle will have to suffer in the years that the market is down.

Which Payout Option Should I Choose?

Income for Guaranteed Period Also Called Fixed Period


With this option, you can select the number of years during which you will receive regular payments.

You have the flexibility to choose a period of 10, 15, 20, or any other desired duration.

In the event of your passing, your beneficiaries will either receive a lump sum payment or continue to receive the remaining payments.


Income for Life Also Called Life Only

Under this option, you will receive payments for as long as you live. Once you pass away, the payments cease.

The amount of your payments is determined by the life expectancy of your group, taking into account factors such as gender, age, location, and health history. If your group has a longer life expectancy, your expected payment will be lower.

Essentially, this option relies on the belief that you will outlive the average life expectancy of your group.

This can be a suitable choice if you are in good health and anticipate surpassing the average. However, suppose you die earlier than the group’s average life expectancy. In that case, this may not be the best investment option unless you don’t need to leave money to your spouse or other beneficiaries.

Income for Life With a Guaranteed Period Certain Also Called Life With Period Certain

This annuity option is similar to the Income for Life option, as payments are based on your group’s life expectancy and continue for as long as you live. The key difference is that if you pass away before the Guaranteed Period expires, your estate or beneficiaries will receive the remaining payments until that period ends.

For example, if you have a 15-year Guaranteed Period and pass away 10 years after starting the payments, your beneficiaries will receive the payments due to you for the remaining 5 years. 

The Guaranteed Period can be 5, 10, 15, or even 20 years, depending on your age at the time of collection and eligibility. Choosing a longer period will result in lower monthly payments that you will receive for your Income for Life with a Guaranteed Period.

Joint and Survivor Life


Under this option, your payments are determined not only by your life expectancy but also by your partner’s life expectancy. 

Payments will continue until both you and your partner pass away, and no payments will be made to beneficiaries.

These are the primary types of annuities, but you may encounter other innovative products that offer slightly different features. It’s essential to familiarize yourself with the options presented here so that you can have an informed discussion with your financial advisor. Take the time to read and understand the terms of your annuity, and don’t hesitate to ask your financial advisor any questions to ensure you fully grasp the intricacies of the annuity you are considering.

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, so make sure you know what you are getting.

   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 can transfer 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. In a variable life annuity, you are not protected against the market risk. 
  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 millions or even more.

   The answer to this question is 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. Insurance products are evolving continuously. Every company tries to keep up and get a leg up on their competitors. Again, make sure you read the contract for each policy that you will have with your insurance company. Do not assume anything. 

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

   The fixed annuities or index annuities have very low fees, compared to the returns that you will get. They have higher fees upfront when the policy is written, but the fees get lower and lower during the life of the policy.  When you look at the fees as percentages against the value of your policy, you will be happy with them. Again, this is something that you will have to make sure of it yourself.  

   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 for that year.

   All insurance companies are required to pay into a fund in the state that they do business in. That fund insures some your investment up to a certain amount that varies from state to state . These associations 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 in the whole history of insurance. 

   Before it gets to that though, other insurance companies usually will take over the failing company. It is good business for most insurance companies to take over another company’s policies.

   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. Our partners are making sure that the insurance companies they work with, have top ratings.

   First of all you have very high 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 choosing a fixed rate return or choosing to participate in the market through an 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, without any floor cap. You should let the insurance company carry the risk. There is no better investment than the right kind of  annuity, where your risk is reduced.    

   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 and paying for marketing, most insurance companies choose to pay commissions to their agents. 

   The commissions to agents are calculated and subtracted from the insurance company’s 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.  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 or how much an agent makes? Some people are saying that because the agent’s commissions are high, the fees are high too. The insurance company chooses what to pay their agents and what returns or guarantees to give you as a client. If you are happy with what you are getting, in the end this is all that matters, right? Also you have to look at what is being paid as percentages for the life of the policy, the same you look at the returns that the policy will provide for you. 

  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 in the end. 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. We are not financial advisors or insurance agents. We have created a pool of vetted financial agents that we have worked with and trust to refer you to them. We chose them because because their goal is to provide financial education to their clients. 

Unfortunately some financial advisors or agents out there get blinded by the commission that they can get and forget that they have a fiduciary responsibility toward you, the client. Choose wisely. 

   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 transferred 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. Also if you are risk averse and don’t like to play roulette with your money, in a time when the market goes on a see saw, or when you are getting close to the retirement years. 

  Our pool of financial consultants, have a lot of products that they can recommend to you. If you don’t like annuities, they can offer you an IUL, if you don’t want either one of these options, they 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.  

For a free 1/2 hour consultation or to request several illustrations based on your situation, go to bookings.



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Last updated: [8/17/2023]

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