Criss Crombie – the Life and Financial expert at Empower – continues his talk on annuities by explaining the difference between a single-pay and a flexible premium. Watch the video below!
Josh: How long does it take to accumulate so much before it pays out?
Criss: Most annuities are what they call single-pay, which means you’re taking money from an IRA and rolling it into it; or you’re taking “mattress money” and rolling it in; or you’re taking money from a CD and rolling it in there. Now there are some annuities out there that are called flexible premium annuity, which means you can put money into on a monthly basis. An example of a flexible premium would be a 403B, which is what teachers use for their retirement as opposed to a 401K. So, what you’re doing, whether you start at age 22 when you get out of college and start as a teacher or somewhere down the road, is you’re taking money out of your paycheck every month and you’re putting it into an annuity. Now another use for a flexible premium life annuity is within a SEPP (Simplified Employee Pension Plan), where you can use the flexible premium annuity by taking some of your employee’s income and deferring it into an annuity, which is similar to an IRA. You can take the money out at any time from your annuity – of course you’ll be penalized prior to age 59 and a half – but I think what you’re asking is at what point… obviously, the longer the money is there the more interest it will accrue, but whatever that account value is the date you start taking distribution will determine what your payout’s going to be.
Josh: If someone is like turning 59 in a month and they’re paying into an annuity, they’re only going to get so much because the annuity hasn’t had time to accrue.
Liza: Most annuities you’re not paying into it. Most of the time, it’s people older than 59, who have a big chunk of money just sitting there, and they need something to do with it. Like the stock market is great if you can ride out the lows, but, you know, in 2008 when it crashed, you need that money now because you can’t wait until 2014 when you have a 12% gain on top of the minus 8 that you lost – that’s where the annuities come in.