Annuities are a popular investment option, particularly for individuals who are seeking a source of consistent income. As there are many types of annuities, it is crucial to select the best annuity for your needs—both today and in the future. The risk of finding yourself in a situation where you outlive your wealth is simply too great; you must consult an income planner and insurance expert who understands the many options available and which choices most align with your specific financial goals and needs.

Many clients approach us with great uncertainty after they’ve researched a few different annuity options and find that they lack the knowledge required to achieve their objectives. An insurance and income planning expert can help you choose the best annuities for your situation, while also recommending any additional investment or insurance options that could prove beneficial.

Income planning is an essential component of your long-term financial plan, but many clients encounter challenges when it comes time to decipher the annuity formulas for current value and future value, and cash flow. The calculation methodology of the many annuities available today varies widely. Understanding this is crucial for performing an accurate evaluation, as is working alongside a trusted advisor.

Deciphering the Annuity Formula: What Type of Annuity Do You Have?

annuity formula calculationsAs you plan your future with a trusted financial advisor and consider buying annuities as part of your retirement plan, it’s important to understand that the type of annuity has a major impact on current and future value. Therefore, as you consider any current annuities, you must determine whether a given annuity is configured to generate income. Some individuals may prefer immediate income, while others opt for a more conservative approach. The latter strategy serves to protect the principal, which is placed into an annuity and will gradually grow in value if you opt to defer income.

Annuities can take many forms, such as:

  • Guaranteed principal fixed-indexed annuities (also called hybrid annuities)
  • Annuities with an immediate income
  • Annuities with a deferred income
  • Multi-year guaranteed principal annuities
  • Annuities with a scheduled income payout

The Core of the Annuity Formula for Value

While there are core formulas for calculating the present value of a future income stream, the truth is that you need to know much more than a simple Present Value/Future Value formula. The reason is that, today, most annuity purchases do not revolve around “old fashioned”  annuitization which essentially requires you to surrender control of your principal and to disinherit your heirs in exchange for an income stream. Today’s “state of the art” annuities often have complex Lifetime Income Riders that do not require annuitization, thereby allowing you to enjoy control of your money while still providing inexhaustible lifetime income after the point that your funds have been depleted by years of income and longevity. These Lifetime Income Riders have different formulas depending on the insurance company and the exact annuity chosen.

Today’s “state of the art” annuities often have complex Lifetime Income Riders that do not require annuitization, thereby allowing you to enjoy control of your money while still providing inexhaustible lifetime income…

Instead of burdening our clients with complex formulas, we help them analyze the myriad of deferral and payout features and percentages that ultimately determine the immediate or future income they can receive. Annuities all cash flow differently. Our role is to help you decide which annuity or combination of annuities will best utilize the growth, deferral, and payout features of the annuities currently being offered. It is no small task, however—and it would be nearly impossible for the average future or current retiree to do on their own.

As with many forms of investments, an annuity’s present value may be unprotected and subject to fluctuation. While we do not offer annuities that are subject to investment losses, the client sometimes has existing variable annuities to consider. This dynamic value can complicate the planning process, particularly if you do not adjust your plan to account for any recent changes in value. If the current value changes, this impacts your financial situation in the short-term. What’s more, your short-term financials inevitably also impact your long-term goals. Therefore, if you go into the financial planning process with inaccurate current figures, your future projections may be skewed by a significant margin.

The future value of an annuity is determined by variable factors such as potential performance and potential income stream levels. Some annuities are established to generate an immediate income, while others may defer income for the future. If the annuity is configured to create an income stream today or at any point in the future, then this stream may carry its own valuea point that must be taken into consideration as you calculate your short and long-term financial values.

Combining Annuities for a More Secure Financial Future

Many individuals opt for a strategic blend of several different types of annuities during the annuity income planning process. In fact, there are hundreds of options when seeking a deferred or immediate income annuity. By leveraging a well-crafted and scheduled income payout strategy, an experienced income planner can help you select a combination of annuities that will meet your financial requirements in the present and well into the future.

By leveraging a well-crafted and scheduled income payout strategy, an experienced income planner can help you select a combination of annuities that will meet your financial requirements in the present and well into the future.

Income planning can be a challenge, but the right income and estate planner can help you develop a solid plan that leverages annuities, life insurance, as well as a selection of other vehicles to help you reach your goals. You can enjoy peace of mind knowing that your financial needs will be fulfilled in the future and that you will have the ability to transfer wealth to your loved ones.

For over 55 years, the experts at Howard Kaye Insurance have been advising clients on annuities, estate planning, and life insurance. We have devised effective strategies that allow our clients to leverage annuities and life insurance to maximize wealth transfer. Contact a Howard Kaye advisor at 800-DIE-RICH to discuss strategies for leveraging a tax-deferred annuity.

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