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Family Pension Funds and Annuities: CD-Type, Immediate, Variable, or Fixed-Indexed

It seems like most of the people who visit Annuity FYI say that they are trying to figure out a better way to grow their money safely and consistently, while at the same time generate income that they can count on, and preserve their lump sum principal so they don’t have to worry about running out of money in retirement. Many express frustration when it comes to finding a solution that can actually do all three of those things at the same time.
There are four main types of annuities that will fit most investor’s specific needs: fixed (CD-type), immediate, fixed-indexed, and variable (there are multiple sub-types as well, many of which are covered in detail on Annuity FYI, including deferred income, secondary market, hybrid, and longevity annuities). An income strategy could include typically just one type, but depending on the situation, may include two or more types.
I recently posted to Annuity FYI an article that examined how to use fixed-indexed annuities to create a family pension fund with guaranteed lifetime income. Since then, many investors have written in to ask whether other types of annuities, specifically CD-type fixed annuities,immediate annuities, and variable annuities, are good candidates for guaranteed income. This article examines those three types of annuities and their role in creating a family pension fund.

CD-Type Fixed Annuities

The best rate as of this writing for the fixed annuity is 3.75% per year (that particular rate is guaranteed for 10 years). There are no fees, and you know exactly how much money you will receive. With CD-type fixed annuities, the annual rate is set and cannot change. You may withdraw the interest monthly, and if your income need is small, the advantage is that you don’t reduce the principal.

However, there are several disadvantages. First, you reduce your potential income by a considerable amount compared with a fixed-indexed annuity, from the same deposited value. Annuity FYI would be happy to run an illustration for you showing how a fixed-indexed annuity with a lifetime income rider can generate more guaranteed income than a CD-type fixed annuity. The second disadvantage comes into play if you fund the CD-type fixed annuity with qualified money (from an IRA or 401k, for example). The IRS required minimum distribution is approximately 3.65% of the account value as of December 31st of the prior year beginning at age 70 1/2, and gradually increases by roughly 0.12% each year. The increases begins accelerating as a person ages. If you fund the CD-type fixed annuity with qualified funds, and a required minimum distribution is necessary or all you need, this may fit your situation very well. But depending on the amount of mandatory distribution, it may exceed the income from your fixed annuity. A fixed-indexed annuity with a required minimum distribution features may be a better fit. Ask your financial advisor or agent to compare the two for you, or call Annuity FYI for a comparison.

You need and deserve good advice from an expert who knows the mountain of information, every advantage, and every disadvantage.


However, since most people need as much income as possible, generated from the least amount of money deposited, typically a fixed-indexed annuity can generate more income than a CD-type fixed annuity.

Immediate Annuity with Lifetime Income

The immediate annuity is perhaps the oldest type of annuity, and it is widely misunderstood by many investors to be the only type of annuity for guaranteed income (which of course is not true).
For an immediate annuity with lifetime income, the income figure is guaranteed for your lifetime, and is annuitization. You are not allowed to change the withdrawal amount, or withdraw lump sums, ever. Period. This is a significant disadvantage. You lose control of your deposit, for the rest of your life, in exchange for the income. If there is still money left in the account when you die, it would go to your named beneficiary, provided that you elected that option on the original application. Contingencies such as lifetime annuitant and adding beneficiaries dramatically reduce the generated income withdrawals.
Mathematically, the immediate annuity has become somewhat of a dinosaur in the industry. Why? Because the newer generation of fixed-indexed annuities (with lifetime income riders, crediting methods, and access to cash) offer increased cash flow over an immediate annuity, as well as access to your principal. This doesn’t mean immediate annuities cannot be a good source of income. The strength of the payout from an immediate annuity is for those near age 80, or payout over a fixed period as part of an income segmentation plan.
For an immediate annuity with lifetime income, the income figure is guaranteed for your lifetime, and is annuitization. You are not allowed to change the withdrawal amount, or withdraw lump sums, ever. Period. This is a significant disadvantage. You lose control of your deposit, for the rest of your life, in exchange for the income. If there is still money left in the account when you die, it would go to your named beneficiary, provided that you elected that option on the original application. Contingencies such as lifetime annuitant and adding beneficiaries dramatically reduce the generated income withdrawals.
Mathematically, the immediate annuity has become somewhat of a dinosaur in the industry. Why? Because the newer generation of fixed-indexed annuities (with lifetime income riders, crediting methods, and access to cash) offer increased cash flow over an immediate annuity, as well as access to your principal. This doesn’t mean immediate annuities cannot be a good source of income. The strength of the payout from an immediate annuity is for those near age 80, or payout over a fixed period as part of an income segmentation plan.

Variable Annuities with Lifetime Income

There are a number of excellent variable annuities on the market that offer lifetime income riders. But generally speaking, variable annuities have higher fees (all-in cost of 3.5% to 4.5%) compared to other types of annuities, such as fixed-indexed annuities, which provide similar income and death benefit guarantees, but without the risk of losing money. I always recommend that investors compare variable annuities directly with the new fixed-indexed annuities, in particular those which have no caps on gains and have averaged 6.9% in annual returns over the most recent 10 years when back-tested.

An excellent financial advisor will work with you to determine how much of your income definitely needs to be guaranteed, and how much risk are you willing to take in generating income in retirement.

Is Your Financial Advisor Offering the Best Products for Your Needs?

There are a number of excellent variable annuities on the market that offer lifetime income riders. But generally speaking, variable annuities have higher fees (all-in cost of 3.5% to 4.5%) compared to other types of annuities, such as fixed-indexed annuities, which provide similar income and death benefit guarantees, but without the risk of losing money. I always recommend that investors compare variable annuities directly with the new fixed-indexed annuities, in particular those which have no caps on gains and have averaged 6.9% in annual returns over the most recent 10 years when back-tested.

IFactors to Consider When Looking for Pension Annuities

Whenever you are evaluating an annuity for its ability to provide you with a pension, think about the “insurance component”. It is this component that can guarantee lifetime income, and it is the most important feature of an annuity. (The insurance component is also referred to in product literature as the protected value, enhanced value, income benefit base, or income account value).
The distinguishing characteristics of each annuity with a lifetime income guarantee boils down to just a few factors: 1) the bonus (or match) percentage; 2) the roll-up/step-up percentage; 3) the withdrawal rate/factor percentage; 4) the guaranteed income versus potential income; and 5) the all-in costs/fees. The withdrawal rate is mathematically the most important of the five factors as it is that percentage which determines the annual generated cash flow. Be sure you are aware of all five of these values when comparing annuities.

Safe, Protected Cash Flow

You need safe, protected, guaranteed cash flow, which functions as a personal pension. An excellent financial advisor will work with you to determine how much of your income definitely needs to be guaranteed, and how much risk are you willing to take in generating income in retirement. In today’s financial world, the most efficient way to achieve that income needs goal is the correct annuity type. You need and deserve good advice from an expert who knows the mountain of information, every advantage, and every disadvantage. Don’t sell yourself, or your retirement, short in this regard.
In my many years of experience, fixed-indexed annuities can be a better option for you because the fees are very low (0.5% to 1% per year depending on the company), the income payout percentage is very high (much higher than variable annuities), and you still maintain access to up to 10% of account value each year without any fee.
At Annuity FYI, we are confident in our ability to help investors because we have a system which shows, in a couple of fairly simple steps, how you can redesign your portfolio so that it grows safely and consistently, how you can generate a steady stream of income that actually gets bigger automatically over time, and how to preserve and recover all of your lump sum principal at the other end as well, either for yourself or your beneficiaries. For more information and to help you find the best annuity for your needs, contact us at 1-866-223-2121.

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Copyright ©2017 AFYI Holdings Group, LLC. All Rights Reserved. No part of this article may be reproduced without the express written consent of AFYI Holdings Group, LLC.

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