Teacher’s Retirement Q&A w/ IALC Expert
With the school year in full swing, it’s a good time for teachers to revisit their own long-term plan and consider preparation for when they are no longer lesson planning. Checking up on your long-term financial planning should include reviewing your current expenses, evaluating any debt balance, analyzing your savings accounts and ensuring you understand how the products in your retirement portfolio will help you achieve your goals. One product available to teachers for their retirement is called a Fixed Indexed Annuity. To help better understand the benefits a Fixed Indexed Annuity (FIA) can add to your retirement portfolio we’ve answered common questions from teachers below.
- What are some of the potential benefits of Fixed Indexed Annuities (FIAs) for teachers?
By providing an income stream that pays as long as you live, FIAs can help give teachers the flexibility to do the things they’ve always dreamed of in retirement, such as traveling, spending time with family and friends, and helping out with their grandchildren’s education. FIAs can give you the option of turning on lifetime income stream and protecting your nest egg from market volatility. Because your money won’t decline as long as it’s in the annuity and you don’t withdraw money from it during the surrender period, setting aside of a portion of your funds in a FIA can help provide balance and stability to your retirement portfolio.
- How is my interest calculated with a FIA?
An FIA uses a unique formula to calculate annual interest based in part on the performance of a stock, bond or commodity index. While the index is used as a benchmark, you don’t actually invest in it—FIAs do not directly participate in any stock or equity investments. Different FIAs will also apply other limitations in determining how much of the index change to credit as interest. These limitations are called caps and participation rates. The cap is the upper limit that can be credited. If the index experiences a 10% return, and the cap is 4%, then 4% of interest is credited to the contract. The participation rate sets a percentage of the index to use. Some of the most popular strategies use a participation rate of 100%, so in that case, the cap would still be the limiting factor.
- Can a FIA help with my taxes in retirement?
FIAs are tax-deferred, meaning the interest you earn isn’t taxed until you take the money out in retirement. When you do withdraw the money, the earnings are taxed as ordinary income. The benefits of tax-deferred earnings allow you to earn interest on the principal, interest on the interest, and interest on the tax savings! And since FIAs don’t have an annual contribution cap when purchased with after-tax dollars, you can contribute as much as you want. Teachers may also have access to FIAs within a supplemental retirement plan called a 403(b) or 457(b) account. These allow you to pay premiums before taxes are taken out, reducing your current year’s taxable income. When these are accessed at retirement, the entire distribution is taxable.
