When it comes time to retire, one method for receiving income from your savings is to purchase an immediate annuity. The purpose of an immediate annuity is to provide a regular payment over a certain period of time or over the investor’s lifetime.

An immediate annuity can preserve a minimum level of income that you cannot outlive. Allocating a portion of your retirement money to an option that will provide income for life can make sense for many retirees.

So how does an investor decide what immediate annuity to purchase?

The scenarios discussed in this article apply in the United States. Readers are encouraged to consult their accountants about tax considerations related to buying annuities.

It’s also important to consider that when earnings from an annuity are withdrawn, they will be taxed as ordinary income, no matter how long the owner has owned the account.

Different Types Of Immediate Annuities

Steve Vernon, a research scholar for the Stanford Center on Longevity, writing for CBS News’ “Money Watch,” noted that immediate annuities can be fixed, inflation adjusted and variable and guaranteed lifetime withdrawal benefit (GLWB). GLWB combines the features of traditional annuities and systematic withdrawals.

Once you purchase a fixed or inflation adjusted immediate annuity, your payout is locked in, Vernon noted. Your payments will not be adjusted based on changes in capital markets.

The monthly payout on a variable annuity, by contrast, will change based on the annuity’s stock and bond portfolio. The owner can modify the portfolio even after they start receiving payments. Vernon recommends keeping the stock allocation between one third and two thirds.

When shopping for GMWB annuities, Vernon recommends annuities with management fees around 50 basis points or lower, and insurance fees round 100 basis points.

Vernon encourages people to use online annuity purchase services like www.immediateannuities.com and Income Solutions and Immediateannuities.com to compare different immediate annuities.

Immediate Fixed Annuity Considerations

Steve Goldberg, an investment adviser writing in Kiplinger, thinks of an immediate fixed annuity as term life insurance in reverse, the longer you live, the better you do.

The insurance company pools the premiums from thousands of its annuities and invests them primarily in bonds. The company also makes educated guesses about how long its annuity buyers will live. It then makes monthly payments to policyholders each month based upon both expected longevity and expected investment returns.

In today’s low-interest-rate environment, that’s much better than an investor can do in all but the riskiest bonds, according to Goldberg. It’s also likely better than an investor can do if he put all his money into stocks.

But there is a catch: With an annuity, you don’t get your money back, unless the buyer opts for what’s known as a “certain period annuity” or similar option. Additional features, however, usually bring additional costs.

Goldberg believes immediate fixed annuities usually make sense only for retirees. The older the retiree, the fewer years the insurance company will have to pay the benefits – so the bigger the monthly checks.

Immediate annuities seldom make sense for all of an investor’s money, Goldberg notes.

Like Vernon, Goldberg suggests going to ImmediateAnnuities.com to compare different immediate annuities. Plug in the state you live in, your age and your gender, and the website provides quotes from numerous companies.

How Immediate Annuities Are Bought

There are three typical ways to purchase immediate annuities, according to Rich White, a financial writer writing in Investopedia.

One method is the annuitization of a tax-deferred annuity. The purpose of a tax-deferred annuity, unlike an immediate annuity, is to build funds to create an income stream at a later date. Most tax-deferred annuities permit the account to be converted at some point in time to a guaranteed income stream.

Another method is the lump sum payment, in which the investor’s funds are transferred to an insurance company to purchase a revenue stream. Oftentimes, the investor is using cash from a retirement plan distribution, lottery winnings or an award from a personal injury settlement.

A third method is the terminal funding of a retirement plan. Some retirement plans offer annuity payouts. The plan in this case terminates its liability to the participant by transferring the participant’s funds to an insurance company. When retirement plans “pay out” in this manner, a “qualified immediate” annuity of offered for tax efficiency.

These choices all present options. The owner of a tax-deferred annuity who wants to annuitize is not limited to the payout offered by the insurance company, White notes. The policyholder can shop payouts offered by competing companies and conduct a tax-free transfer to the company offering the best terms. This is known as a Section 1035 exchange.

If a retirement plan offers a particular insurance company for terminal funding, the policyholder can shop for others and select the plan they find most suitable.

An annuity payout over a fixed number of years that is purchased with a single sum can be converted to an annual interest rate equivalent, White noted.

If, for example, the policyholder is quoted an annuity of $600 per month for 20 years in exchange for paying a premium of $10,000, an annuity rate calculator will find this payout converts to an annual interest rate of 3.96%. This rate can then be compared to other fixed-period annuity payouts, perhaps over longer or shorter periods, and also to rates available on bonds, money market funds or CDs.

For a lifetime annuity payout, there is no fixed period to evaluate. Death could occur at any time, and the payments would discontinue. White recommends a good starting point is to use the annuitant’s life expectancy as the payout period.

If a 67-year-old female is offered a lifetime payment of $600 per month for a $100,000 premium, her life expectancy would be 17.67 years, based on the 2007 Period Life Table published by the Social Security Administration.

Immediate Annuity Payout Options

One payout option for immediate annuities is income for a guaranteed period, which is also called “certain period annuity,” according to CNN Money, as noted in a previous article on annuities’ role in financial planning. This guarantees a specific payment for a specific time period. If the owner dies before the period ends, their beneficiary receives the remainder of the payments.

Another option is lifetime payments that guarantee a payout for the owner as long as they are alive, but there is no survivor benefit. The payouts can be variable or fixed, depending on the type of annuity selected. The amount of the payout depends on the amount invested and the owner’s life expectancy.

Still another payout option is life with a guaranteed period certain benefit, also known as “life with certain period.” The owner receives a guaranteed payout for life along with a period certain phase. If the owner dies during the certain period, the beneficiary continues to receive the payment for the remainder of that period.

Joint and survivor annuity is one in which the beneficiary continues receiving payments for the rest of their life after the owner dies.

Do Your Homework

It is important to buy an annuity from a company that holds a top credit rating from the three leading agencies of U.S. insurance companies: A.M. Best, Moody’s and Standard & Poor’s.

The considerations for shopping for an immediate annuity are extensive. Investors must spend their time comparing options. Many retirees will find it worth their time to work with a financial adviser.

Those who seek the assistance of an insurance agent must keep in mind that insurance agents are paid commissions by the insurance companies offering the annuities. Investors have the option of working with a non-commissioned financial adviser.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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The head of Binance has officially denied rumors that the exchange was hacked on Wednesday, claiming that “irregular trades” have now been fixed. Speculation that the exchange might have been hacked triggered a sharp reversal in the fortunes of most major cryptocurrencies.

No Hack

The company’s CEO Changpeng Zhao reassured traders Wednesday that their accounts had not been compromised.

“We have localized the irregular trades, they will be reversed. All funds are safe, thanks to the fast alarm. Please learn to secure your accounts against phishing,” he tweeted Wednesday afternoon.

Users took to Reddit, Twitter and other social media channels on Wednesday to report highly suspicious activity on their Binance accounts. Several traders reported that their altcoins were suddenly liquidated without prior warning or consent. Oddly enough, the loss of altcoins was associated with a massive spike in Viacoin (VIA), a relatively obscure cryptocurrency that more tripled in value on Wednesday.

Following the reports, Binance quickly froze trading and withdrawals to investigate the matter further. The loss of coins seems to inflict accounts with registered API keys, which are used to enable trading bots. The exchange issued a follow-up statement informing traders that the Binance platform had not been compromised:

“As of this moment, the only confirmed victims have registered API keys (to use with trading bots or otherwise). There is no evidence of the Binance platform being compromised.

Please remain patient and we will provide an update as quickly as possible.”

Fears of a coordinated cyber breach made for a highly turbulent session in the crypto markets. The total value of all crypto assets briefly plunged by more than 10% as traders rushed to exit their positions.

Cyber Security Remains a Major Concern

Crypto exchanges are routinely the target of sophisticated cyber attacks, a trend expected to intensify as digital currencies rise in value. Attackers have already made off with billions of dollars worth of stolen cryptocurrencies over the years.

It was just last month that Japan’s Coincheck was drained of $500 million in NEM after hackers successfully redirected the coins into alternate account. The heist was the biggest the market had ever seen, surpassing the 2014 attack of Mt Gox.

Exchanges have stepped up their security guidelines in response to the wave of attacks. This includes adopting stricter KYC/AML requirements and reminding users how to better safeguard their accounts.

Hacking attempts aren’t just limited to exchanges. It has been estimated that roughly 10% of all ICO funds have been compromised by cyber criminals. With billions flowing into the ICO market, that’s no small number.

Disclaimer: The author owns bitcoin, Ethereum and other cryptocurrencies. He holds investment positions in the coins, but does not engage in short-term or day-trading.

Featured image courtesy of Shutterstock

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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Annuities are contracts issued by insurance companies that have some tax advantages. They are often used in retirement planning because they can provide an income stream after generating earnings on a tax-deferred basis.

Bob MacDonald, founder of LifeUSA, writing in Forbes, defines an annuity as a long-term contract between a buyer and an insurance company that allows the accumulation of funds on a tax-deferred basis for later payout in the form of a guaranteed income, the core strength being the safety the guarantees. MacDonald believes annuities have a place in a retirement plan.

There are many types of annuities. This article will describe the main types of annuities and the ways they can be used in retirement planning.

The scenarios discussed in this article apply in the United States. Readers are encouraged to consult their accountants about tax considerations related to buying annuities.

CNN Money encourages people to consider an annuity after they have maxed out other tax-advantaged retirement investment vehicles, such as IRAs and 401(k) plans. If a person has additional money to set aside for retirement, an annuity’s tax-free growth can be beneficial, especially if the investor is in a high-income tax bracket.

Annuities have drawbacks, CNN Money notes. The money cannot be withdrawn for a period of time without incurring a penalty fee and taxation. Typically, if the owner makes a withdrawal within the first five to seven years after buying the contract, they will have to pay a surrender charge of up to 7% or more on the withdrawn amount. Annuities sometimes charge other fees as well.

Immediate And Deferred Annuities

There are two basic types of annuities: immediate and deferred.

The purpose of an immediate annuity is to provide income for the owner right after buying the annuity. People typically buy an immediate annuity as a way to have a guaranteed income.

The purpose of a deferred annuity is to grow the funds to provide future income. Deferred annuities can be converted to immediate ones when the owner wants to begin collecting their payments.

Annuities have different payout options.

One option is income for a guaranteed period, which is also called “certain period annuity,” according to CNN Money. This guarantees a specific payment for a specific time period. If the owner dies before the period ends, the beneficiary receives the remainder of the payments.

Another option is lifetime payments that guarantee a payout for the owner as long as they are alive, but there is no survivor benefit. The payouts can be variable or fixed, depending on the type of annuity. The amount of the payout depends on the amount invested and the owner’s life expectancy.

Still another payout option is life with a guaranteed period certain benefit, also known as “life with certain period.” The owner receives a guaranteed payout for life along with a period certain phase. If the owner dies during the certain period, the beneficiary continues to receive the payment for the remainder of that period.

Joint and survivor annuity is one in which the beneficiary continues receiving payments for the rest of their life after the owner dies.

The primary factors taken into account in the calculation of annuity payments are the current dollar value of the account, the age of the owner, the expected future inflation adjusted returns from the assets in the account, and the annuitant’s life expectancy based on industry standard life expectancy tables, according to Investopedia.

Surrendering Annuities

An annuity can be surrendered. If the owner surrenders their annuity before a specific time period, there will likely be a surrender fee. The surrender charge usually declines by one percentage point per year after the annuity is purchased until it disappears completely, usually after seven or eight years.

It is possible to exchange an existing annuity for a new one. These are known as 1035 swaps under the IRS code in the U.S., according to CNN Money. There are no taxes incurred when exchanging one annuity for another. However, when exchanging an old annuity for a new one, the owner begins a new surrender period.

In addition, the spousal provisions in the annuity contract are also considered.

Fixed And Variable Annuities

Annuities are usually either fixed or variable.

A fixed annuity offers an assured amount of payment over the payment term or the annuitant’s life and carries little risk. The annuitant usually receives a fixed amount of money every month for the rest of their life. However, the price for removing risk is limiting growth opportunity. Should financial markets have a bull market, the annuitant misses out on these additional gains.

Variable annuities, on the other hand, allow the annuitant to participate in the potential appreciation of their assets while still drawing an income from their annuity. With a variable annuity, the insurance company typically guarantees a minimum income called a guaranteed income benefit option and offers an excess payment amount that fluctuates based on the performance of the annuity’s investments.

Variable annuities can provide a balance between guaranteed retirement income and continued growth exposure, according to Investopedia.

Variable annuities usually have management fees. The ongoing investment management and other fees oftentimes amount to 2% to 3% a year.

The fee structures can be complex. Insurance agents and others who sell annuities often tout the positive features and downplay the drawbacks, making it important for the purchaser to carefully review the annuity before buying.

Not all annuities have high fees, however. “Direct sold annuities” that are not sold by insurance agents do not charge a sales commission or a surrender charge, according to CNN Money. Companies offering “direct sold annuities” include Schwab, Fidelity, Vanguard, T. Rowe Price, Ameritas Life and TIAA-CREF.

Before investing, one should compare the annuity fee structure with regular no-load mutual funds. No-load mutual funds levy no sales commission or surrender charge and impose average annual expenses of less than 0.5% for index funds or around 1.5% for actively managed funds.

It’s also important to consider that earnings from an annuity will be taxed as ordinary income when the earnings are withdrawn, no matter how long the owner has owned the account.

For some investors, it is critical to secure a risk-free income for their retirement. Other investors are less concerned about fixed income than about continuing to enjoy the capital gains of their funds. These needs determine it is better to choose a fixed or variable annuity.

The factors in deciding between an annuity and a mutual fund will be addressed in a future article.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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3.9 stars on average, based on 8 rated postsLester Coleman is a veteran business journalist based in the United States. He has covered the payments industry for several years and is available for writing assignments.

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