Understanding Annuities: A Cardinal Guide to Three Key Types

Today, we’re getting into the often-misunderstood world of annuities. Many consumers view annuities as a one-size-fits-all solution, but there are actually several types, each serving distinct purposes. We’ll focus on three specific types that we frequently use in our financial planning practice.

SPIAs are a popular choice for immediate income needs. These annuities are often used when someone, say at 65, is planning for Medicare and considering delaying Social Security benefits until 70. By converting a portion of their IRA into a SPIA, they can receive a steady income stream for a set period, often five years. This strategy provides a bridge income, allowing the rest of their retirement funds to continue growing.

This type of annuity provides income security while minimizing market risk. Unlike SPIAs, Fixed Indexed Annuities are not directly tied to market performance, though they may be linked to a market index. They are used to guarantee income at a future date, often providing lifelong financial stability. This makes them an excellent tool for mitigating longevity risk – the risk of outliving your assets.

MYGAs are akin to high-yield CDs but with the added benefit of tax deferment. They offer a fixed interest rate over a predetermined term and are particularly effective for those seeking a risk-free return. MYGAs are often used to complement a diversified portfolio, replacing the bond component or supplementing bank savings with better interest rates.

Understanding these annuities is crucial because they each address different financial planning needs. Whether it’s creating immediate income, ensuring future financial security, or seeking a safe, guaranteed return, annuities can be powerful tools in a well-rounded financial plan.

Our goal in this blog post is to clarify the different types of annuities and their applications. As with any financial planning tool, it’s essential to understand your personal financial situation and goals to make the best choice. We hope this guide has shed some light on the complex world of annuities.

For more detailed information and examples, check out the show notes linked below our video and on our website under the Learning Center.

As always, we’re here to help you navigate your financial journey. If you have any questions or need personalized advice, don’t hesitate to reach out.