0013. The 7 Benefits of 3rd Generation Annuities

Financial Independence Now

In this episode, I continue my deep dive into annuities, focusing on the transformative benefits of 3rd generation annuities. These modern financial tools offer a balanced and secure approach to planning your financial future. I explore 7 key benefits—flexibility, safety, liquidity, growth, tax deferral, low to no fees, and longevity protection—and discuss how these features can empower you to achieve your financial goals. Tune in to discover how 3rd generation annuities can be a cornerstone in your journey toward financial independence.

If you missed our previous episode, I highly recommend starting there to gain a comprehensive understanding of the evolution from 1st, 2nd and 3rd generation annuities and how each generation differs. This foundation will enrich your understanding of the powerful benefits I discuss today.

Episode Highlights and Takeaways:

Annuity - A private, portable pension plan, of which there are 3 types:

1st Generation Annuity (Fixed Annuity/FA) - Similar to a certificate of deposit (CD), where all elements of this type of annuity are protected and guaranteed. Like the CD, both the principal and earnings are protected from losses. Unlike a CD, where interest is taxed as earned, the earnings of the 1st Generation Annuity are tax-deferred until distributed. The primary method of distribution is called "annuitization". Annuitization surrenders the principle and earnings in exchange for ongoing payments/distributions. The payments are made to the annuitant for a guaranteed period of time, ranging from a specific number of years to the lifetime of the annuitant. Once annuitized, the distributions generally cannot be changed or stopped and, the principle is no longer available for lump-sum withdrawals.

2nd Generation Annuity (Variable Annuity/VA) - An annuity that primarily invests in stocks, bonds or mutual funds to provide the opportunity for higher earnings and growth. Just like a 1st Generation Annuity, the earnings of a 2nd Generation annuity are deferred from taxes until distributed and the primary method of distribution is "annuitization". However, the 2nd Generation Annuity has no guarantees to protect the principal from potential losses. In addition, the 2nd Generation Annuity is often subject to higher fees than other types of annuities.

3rd Generation Annuity (3GA/Fixed Indexed Annuity/FIA) - The 3GA is a hybrid that combines the safety, security and guarantees of a 1st Generation Annuity with some of the upside earnings potential of a 2nd Generation Annuity. The 3GA is a safe, flexible and liquid annuity, that can be designed with low or even no fees. A 3GA can be annuitized to provide income, however, most often the annuitant will choose to exercise the more flexible "Income Rider" option instead. Similar to annuitization, the Income Rider is a private, personal and portable pension-like plan that provides a guaranteed ongoing distribution of money that one can never outlive. The significant difference between the income rider and annuitization is that the principle is never surrendered, making it possible to receive lump-sum withdrawals of money as needed. Additionally, the distributions can be increased, decreased or stopped altogether.

The 7 Primary Benefits of the 3GA - Flexibility, Safety, Liquidity, Growth, Tax Deferral, No/Low Fees and Longevity Protection

1. Flexibility - The 3GA generally combines multiple earnings strategies, a variety of low/no-fee strategies, as well as a number of liquidity/distribution options to address your goals and needs today. It can also be modified if your situation changes in the future.
2. Safety - A 3GA protects both principal and earnings from losses by eliminating drawdown risk* during the accumulation phase and, by eliminating the sequence of withdrawal risk* during the decumulation phase. With the addition of an income rider, the 3GA protects against tail-risk* as well.
3. Liquidity - A 3GA provides ongoing penalty-free access to some of your principal at all times. If serious health issues develop, then larger amounts of penalty-free withdrawals become available as well. For example, 100% penalty-free withdrawals are always available after a specified period of time or, immediately, upon the death of the annuitant.
4. Growth - The 3GA provides a number of crediting methods to grow your account's value, all with no market risk to the principal and earnings.
5. Tax Deferral - Earnings are deferred from income taxes until those earnings are withdrawn.
6. No/Low Fees - A 3GA generally has no trading costs, no M&E (mortality & expense) charges or management fees. Only optional rider fees may apply, if elected.
7. Longevity Protection - The 3GA's income rider option is a flexible, private, personal and portable, pension-like plan, that eliminates tail-risk, the risk of running out of money, by providing guaranteed ongoing income you will never outlive.