The Essence of an Annuity

The Essence of an Annuity - Earlebird.com

Recently, I was looking back at old annuity marketing material that I used back in the 1980s, and I came to the conclusion that the annuity was different back then. Back then, we would show a deposit growing tax-deferred from the client’s age of 60 to the attained age of 75. At age 75, the annuity contract would be annuitized, or converted to a lifetime income payout.

The big difference from the way things are today was that no withdrawals would be taken from the tax-deferred annuity. Oh, yeah; that’s what we called the product; it was a tax-deferred annuity. We didn’t call it a variable, a flex, an index or any other term. Why did we only call it a tax-deferred annuity? That’s right, because that’s all it was. It was a fixed guaranteed savings vehicle, very plain vanilla, and the primary thing that mattered was the tax-deferral. Annuity owners didn’t have crediting methods, spreads, caps, index averaging or performance triggers. Annuity owners had interest. Period.

But when you were able to defer income taxes for 15 years, that was the only powerful feature needed. Don’t forget, interest rates were much higher then. Interest rates were over 7% and the minimum guarantees were about 4%. So when you tax defer that kind of yield over 15 years or longer, you really have a strong product. But of course, you will need to pay taxes on the accumulated taxes one day.

But at age 75, when the income began, the amount received as income wasn’t 100% taxable if it was non-retirement deposits. The original deposit amount–and the taxable interest–were combined in the income payments received. That allowed the annuity owner to evenly distribute the built-up taxable interest over his or her lifetime. So to sum up this old-time purchase: a deposit purchased an annuity, then it went untouched for several years, allowing the tax-deferral feature to gain strength. Then, when income was needed later in life, the taxes and income were received until s/he passed. We called this product a supplemental retirement account–or just simply, a tax-deferred annuity.

Are you saying to yourself, “Earl, why did the IRS change the annuity product?” Or maybe you’re saying, “It’s a shame this supplemental product doesn’t exist anymore.” Well, guess what? Nothing happened. Not with the tax laws, nor with the products. The only thing that has changed is the way annuities are sold.

Annuities are almost considered a completely separate asset class. Tax-deferral is not even mentioned now, primarily because annuities are sold with the idea that income/withdrawals will be taken shortly after purchase. So tax-deferral has been forgotten, primarily because no one defers the taxes any longer.

What about taxes spread out over lifetimes? That doesn’t fly anymore, either. Withdrawals are taken out, and withdrawals are taxed 100% until the all the contract interest is depleted. The simple tax-deferred annuity concept has long gone away. It’s been replaced by multi-page illustrations showing how withdrawals can be paid out. They are so damn confusing! In our desire for sophistication, we have lost the true essence and beauty of the old-time annuity story. Another reason to say, “Bring back the old days!”

Pay-it Forward:

I heard that we are finding a ton of oil in the Dakotas. In fact, I heard that if South Dakota were a country, it would qualify for OPEC. Why do I bring this up? Because I expect a ton of jobs to be created in that area. Teachers, attorneys, plumbers and carpenters will be needed in these boom towns. Teach your son or daughter to pursue opportunities. It might be a great time to move for a job!

Earl E Bird

I'm Earl E. Bird and I am very concerned about saving for my senior years. I am amazed at the stumbling blocks that exist when saving for retirement. That's why I take my time when making decisions on building my nest egg.

More Posts - Website - Twitter

 
 
 

About the author

I'm Earl E. Bird and I am very concerned about saving for my senior years. I am amazed at the stumbling blocks that exist when saving for retirement. That's why I take my time when making decisions on building my nest egg.

More posts by | Visit the site of Earl E Bird

 
 
 
WP-Backgrounds Lite by InoPlugs Web Design and Juwelier Schönmann 1010 Wien