You’ve probably heard that diversification is a smart retirement strategy. However, you may not know what the best tools are and why. For example, incorporating an annuity into your retirement portfolio offers several advantages, depending on your financial goals, risk tolerance, and overall strategy. So, should it be part of your retirement plan? In the definitive guide to annuities below, the trusted and experienced advisors at Leonard Financial Solutions explain everything you need to know before moving forward. 

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Table of Contents:

What is an Annuity? 

An annuity is a long-term financial product that can help you save for retirement or other goals. It’s designed to provide a steady income stream, tax benefits, and the security of knowing your money will be there when needed. Depending on the type of annuity, you may have access to various features such as death benefits, withdrawal options, and potential investment growth.

annuities long-term financial solution

How Does an Annuity Work?

Annuities allow you to deposit a lump sum of money into it or make regular payments over time. The money is then invested in financial markets, such as stocks, bonds, and mutual funds. Depending on the type of annuity, your money may grow at a higher rate than it would in a savings account or other low-risk investments. 

When you begin to receive payouts from the annuity, you’ll typically receive more than you put into it due to investment growth. 

The Benefits of Annuities

Learning all you can about annuities helps paint a clearer picture of how they might fit into your long-term financial goals. Although plans vary, here are some popular benefits: 

  • An annuity can provide a steady income, tax advantages, and death benefits.
  • Unlike retirement accounts like IRAs and 401(k)s, annuities have no contribution limits. This can be advantageous if you’ve maximized your contributions to other tax-advantaged retirement accounts and still want to invest more for retirement.
  • Withdrawals from some types of annuities may not be taxed until they are withdrawn.
  • Many also offer death benefits that can help protect your beneficiaries after you pass away.
  • They provide stability and security, as the invested money is less vulnerable to market fluctuations than other investments.

It’s essential to remember that an annuity can be a complex financial product with various features and fees, and some plans might not offer the same level of flexibility and liquidity as other retirement investments. Our team would be happy to schedule a consultation with you to discuss just how annuities may fit into your overall retirement strategy, so please give us a call.

Different Types of Annuities Offered Nationwide

Not all annuities are the same. Below, we take a quick look at the most popular annuity options for retirees.

Fixed Annuities 

Fixed annuities earn a guaranteed annual interest rate of around four or five percent during the contract's accumulation period and provide regular payments after annuitization. Though fixed annuities offer principal protection so you can't lose the money you've invested, they lack liquidity and growth potential.

  • Pros: Principal protection
  • Cons: Lack of liquidity and no opportunity for growth

Variable Annuities 

Variable annuities let you direct your premium payments to stocks, bonds, or mutual funds, with the value of the annuity fluctuating based on the performance of the underlying investments. Though this allows for up-market growth, variable annuities don't provide principal protection. Therefore, you can lose money in a downturn. In addition to risk, variable annuities typically involve substantial management fees.

  • Pros: Unlimited growth potential
  • Cons: It doesn't protect your principal and has hefty management fees 

Fixed Indexed Annuities 

Like variable annuities, a fixed-indexed annuity's growth is connected to the performance of an underlying stock market index you've selected. However, unlike variable annuities, stocks, and other riskier investment options, fixed-indexed annuities provide principal protection, so you can't lose the money you've invested. With a fixed indexed annuity, your annual interest rate is never less than zero, even in a down market.

  • Pros: Principal protection and growth potential
  • Cons: Some fixed indexed annuities impose limits on interest accrual, limiting growth potential

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What to Consider When Selecting a Retirement Annuity 

Choosing the right retirement annuity is a crucial decision that can significantly impact your financial security in your golden years. Keeping these essential factors in mind can help guide your annuity selection.

  • Annuity Types. Different types can help you achieve different goals. Carefully exploring each annuity you're considering can help ensure it aligns with your retirement objectives.
  • Risk Tolerance. Understanding your risk tolerance is essential when selecting a retirement annuity. Determining whether you're comfortable with the idea of financial loss in retirement can help you choose between principal-protected annuities and those subject to the whims of the market.
  • Payout Options. Various plans offer wide-ranging payout options, from lifetime income to payouts for a defined period to lump sum withdrawals. Figuring out which annuity offers the option that best aligns with your needs and preferences can help direct your decision.
  • Fees and Expenses. Some annuities entail higher fees and expenses than others. Evaluating how these expenses might fit into your budget can help you decide between annuities with significant fees, like variable annuities, and those associated with lower costs.
  • Interest Rates or Investment Performance. Fixed annuity interest rates and historical or projected returns for variable or fixed-indexed annuities help give you an idea of what to expect from your investment. Exploring these figures lets you choose an annuity that meets your needs.
  • Flexibility and Liquidity. How you fund the annuity and whether you can access your money during the contract's accumulation phase are essential considerations that can help you narrow your retirement annuity choices. Determining which annuity type offers your desired level of flexibility and liquidity can help you select the right annuity for your retirement portfolio.
  • Surrender Period and Terms. Some annuities have a "surrender period" that allows you to cash in the annuity contract early for a fee. Assessing the surrender period and terms is a key factor in selecting a retirement annuity, as it dictates the conditions under which you can access your funds without incurring penalties, influencing your long-term financial strategy.

Understanding Surrender Penalties

When weighing annuity pros and cons, surrender penalties inevitably include drawbacks. It's easy to understand why paying a fee to cash out your annuity contract early isn't immediately popular. However, surrender penalties are crucial: they protect the annuity company and, most importantly, your money.

Surrender penalties keep your money secure and the annuity company from suddenly going belly up. By limiting liquidity to a small percentage of the annuity's value during the accumulation phase and requiring annuitants to pay a substantial penalty to surrender the contract early, the annuity company always has money to invest.

Considering surrender penalties' critical role in protecting your investment, you might move this "con" to the "pro" column.

The Difference Between Putting Your Money in an Annuity vs the S&P 500

Riding the highs and lows of a roller coaster at an amusement park is always a good idea. However, riding the highs and lows of the market when your financial future is at stake … not so much. When losses aren’t an option, as is the case when you put your money in an annuity with downside protection, you can keep so much more money than if you had placed your money in the S&P 500.

graph detailing the difference between an annuity and the S&P

Below is a chart that details the financial difference between having your money in an annuity over 22 years and the annual return of an S&P 500 index fund over the last 22 years.

chart showing the difference between an annuity and the S&P 500

How Leonard Financial Solutions Can Help You Build a Diversified Investment Portfolio

At Leonard Financial Solutions, we realize that you only get one retirement—and after a lifetime of hard work, you deserve to have the retirement income you want. Our team of experienced, independent financial advisors and annuity providers are here to help you build a diversified investment portfolio that enables you to live the retirement of your dreams. Here's what you should know about working with our New Jersey-based advisors.

  • We Walk You Through All Your Retirement Investment Options. You don't have to be an investment guru to work with our advisors. We're happy to start at square one and explain everything from the meanings of common terms to your investment options to the stability and security that can come with adding the right fixed-indexed annuity to your retirement portfolio.
  • We Partner With Reputable and Established Annuity Carriers. Your financial security in retirement is vital to us. That's why we partner with reputable and well-established annuity carriers with A+ ratings and hundreds of billions of dollars in assets. This level of financial strength and stability gives our clients assurance, longevity, and protection against collapse or financial instability.
  • We Offer Fixed Indexed Annuities With Exceptional Benefits. Fixed-indexed annuities are one of the best additions you can make to your retirement plan—and the fixed-indexed annuity plans Leonard Financial Solutions offers are an even better choice than most. Here's what sets our fixed-indexed annuities apart.
  • Purchasing and Funding Flexibility. Purchase our fixed indexed annuities with a simple lump sum or make periodic payments—you decide.
  • Uncapped Interest Equals Unlimited Growth Potential. Our fixed-indexed annuities don't place artificial limits on interest accrual, so when your selected market index performs well, you reap the full benefits. Our annuity plans also offer principal protection, so your interest rate is never less than zero, even in a down market.
  • Limited Liquidity Means Partial Access to Your Annuity Funds Without a Fee. With our fixed-indexed annuities, annuitants can withdraw up to 10 percent of the annuity's value annually during the 10-year accumulation period. These annuity plans also include an illness rider, allowing for penalty-free withdrawals or surrender if you are diagnosed with a terminal illness or require long-term care in the first ten years of the contract.
  • Returns That Typically Best Inflation. Our fixed-indexed annuity options give you the upside of the market, along with uncapped average returns that historically outperform inflation and allow you to enjoy future annuity payments. 

Contact Our Experienced Financial Advisor for a Free Consultation

Partnering with an experienced retirement planner is a great way to maximize your efforts to build a stronger financial future. At Leonard Financial Solutions, our team listens to you, assessing your current financial situation and then creating a plan customized to specific goals and needs. 

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When you work with us, you can rest assured the options you choose align perfectly with your overall goals for financial security. Click the button above or select a date on the calendar below to schedule a free consultation with our experienced financial advisor. Although we're located in Moorestown, NJ, we happily serve clients from all over the United States.