Think First

Understanding Annuities

“There’s no mystery to enjoying a comfortable retirement—it begins with careful planning.

And the sooner you begin, the better.”

Thinking Ahead

There’s no mystery to providing for a comfortable retirement–it begins with careful  
planning. And the sooner you begin, the better. This is particularly true when one considers realities such as inflation, taxes and potential cuts in Social Security benefits. To deal with these issues, many investors are making annuities a part of their retirement planning strategy. To develop a better understanding of annuities and how they work, it’s necessary to begin with the basics. 

What is an Annuity?

An annuity is a contract issued by an insurance company that guarantees a steady stream of payments at some point in the future. Traditionally, annuities safeguard against the risk of an investor outliving his or her assets by providing periodic income payments that can be guaranteed for life. When used  judiciously, as long-term investment vehicles that grow tax-deferred, annuities can be a powerful financial product . In taking a closer look at annuities, it is useful to break them into categories, comparing and contrasting the different types.

Immediate vs. Deferred Annuities

An immediate annuity is purchased with a single payment and is designed to generate an immediate stream of income. Payments to the annuitant typically begin within sixty days after the contract has been annuitized (converted into income). A deferred annuity, on the other hand, is characterized by an accumulation period. The contractholder funds a deferred annuity by making periodic premium payments or by making a single, lump-sum payment. The assets accumulate tax-deferred and payments are put off until a later date, at which time the contract holder may select a payout option.

Fixed vs. Variable Annuities

Annuities that offer a guaranteed rate of  return for a set period of time are called fixed annuities. This rate is determined and guaranteed by the life insurance company that issues the contract. In a variable annuity, you are offered investment choices through a selection of “sub-accounts” whose values will fluctuate over time. Consequently, the return on a variable annuity is a direct reflection of the investment performance of the subaccounts. The choice of a fixed or variable annuity usually depends on the contractholder’s specific needs and goals, as well as risk tolerance.

Single Payment vs. Flexible Payment Annuities

A single payment annuity is purchased with a single lump-sum payment at the inception of the contract. This means that the funding of this annuity is achieved with one payment. Conversely, flexible payment annuities are purchased with periodic payments, payable on a flexible schedule.

The Tax-Deferred Advantage

One of the primary advantages of annuities is that they are tax-deferred, which means that you pay no current income taxes on the gains your annuity earns until you withdraw your money. Tax-deferral allows the value of your annuity to potentially grow faster than in a comparable taxable investment earning the same return primarily because of the power of compounding. Because the government established the rules for tax deferral in an effort to encourage Americans to save for retirement, withdrawals made before age 59¹/2 may be subject to a 10% federal tax penalty on the amount of earnings withdrawn, in addition to any income taxes due on that amount. The following chart shows the general advantage of tax deferral:

Tax Deferral: The Accumulation Edge

Tax Deferral-the Accum Edge - GRAPH - Click Here

Assumes a $2,000 annual contribution made on January 1 for each of 30 years, a growth rate of 8% compounded annually, and a 30% combined federal, state and local income tax bracket. No reference to any specific product is intended. This illustration does not reflect mortality and expense charges, sales charges and other administrative fees typically found with annuities. This example is hypothetical and does not represent an investment in or performance of any First Investors Life annuity.

This information is general in nature and should not be construed as tax advice. You should consult a tax or financial adviser as to how this information may affect your circumstances. 

The Benefits of Diversification

Although variable annuities are different from mutual funds, they are similar in that your money is pooled with that of other variable annuity and variable life insurance owners with similar objectives and is invested in professionally managed portfolios. Most variable annuities allow you to choose among portfolios of stocks, bonds and money market instruments. This affords you the advantage of greater diversification. In addition, you may adjust your allocations among the available subaccounts to rebalance for your risk tolerance and circumstances without incurring a current tax liability. In turn, diversification helps minimize your investment risk by reducing the extent to which you are affected by a decline in any one portfolio. Of course, diversification does not protect against overall market trends that generally affect stocks or bonds.

The Guaranteed Death Benefit

The death benefit guarantees that your beneficiary will never receive less than the amount you contribute to your contract (less any withdrawals you make) even if the balance declines because of market fluctuations. Any assets remaining in your annuity (minus withdrawals and fees) can be passed on directly to your named beneficiaries without the cost and delays of probate.

Talk to a Registered Representative

When you decide the time is right for you to start thinking about your retirement options, be sure to talk to a First Investors Registered Representative. He or she can go over your circumstances to help determine if an annuity is right for you. Even if you have established a retirement  
plan, an annuity is an excellent method to supplement that plan, and, you’ll want to review it annually with your registered representative to make sure that it’s in keeping with your time horizon and retirement goals.

For more complete information on any  First Investors product, including charges and expenses, contact First Investors for a free prospectus. Please read it carefully before you invest or send money.

Financial Services With A Personal Touch

First Investors has been serving the needs of investors since 1930. Through the Great Depression,World War II, and numerous recessions, we have remained committed to our mission–helping our clients reach their financial goals. Today, we offer a wide range of high quality financial products and services that includes mutual funds, variable annuities and life insurance. We pride ourselves on providing financial services with a “personal touch.” Your First Investors Registered Representative is a highly trained professional who will take the time necessary to learn about your current financial situation, risk tolerance, and future goals. Your Registered Representative will work closely with you to custom-tailor a suitable strategy to meet your financial needs.

First Investors Corporation

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New York, NY 10005

www.firstinvestors.com