Saving for your Retirement Years with Annuities
As you plan for your retirement, you are likely to come across the mention of something called an annuity, and with good reason: An annuity is an excellent way of guaranteeing a stable income in your retirement years.
Suppose that by the time you retired at 65, you had enough money saved to live comfortably for 15 years. This number isn't too unreasonable; life expectancy in the US for those born in 2001 was 77.2 years, having risen steadily from a mere 49 years for those born in 1901. But just because the nation-wide average person will live for 12 years after retirement doesn't mean this will be true in your case. What will you do when you're still going strong at 78, but your savings account is on its last legs?
You won't be too far off the mark if you think of an annuity as a life insurance policy in reverse. Where life insurance is meant to protect your loved ones from financial hardships in the event of your death, an annuity is meant to guard you against outliving your retirement savings.
The idea is simple: You use your savings to purchase an annuity from your life insurance company. In return, the company pays you an agreed-upon monthly amount, and continues to do so until your death. You get peace of mind, higher interest returns on your savings, and lower taxes, since only the amount you recieve each month is taxed, rather than the entirety of your savings at once. But what happens if you die before your savings would have run out? That is entirely up to you.
The beauty of the annuity is its flexibility – enough variants to suit your needs, whatever they are today or may be in the future. If you have no one to leave the money to, you can purchase a Straight Life annuity, where the remainder of the principal is not refunded if you die before your savings are spent.
Fund Your Retirement With An Annuity
The advantage of the straight life annuity is higher interest rates than many of the other options.
If, on the other hand, you have children (or a favourite charity) to whom you wish to leave the remainder of your savings, you can purchase a Period Certain & Continuous annuity. This variant will also pay out for the rest of your life, but if you die within a predetermined period (say, 10 years), the insurance company will keep paying the annuity to your beneficiaries up to the end of that period.
Suppose you wanted to cover both yourself and your spouse. The variant to consider would be a Joint & Survivor annuity. Should one of you die, the other will continue to be paid an annuity, though usually a somewhat diminished amount. But again, the choice is up to you, and yes, there is an option to have the full annuity amount be paid out to the survivor.
Finally, you should keep in mind that it's never too late. There is no deadline by which you have to have purchased an annuity, nor will buying one make your other savings less important. You can buy an annuity with an extended savings plan or with a single lump sum. You can vary the payment amounts. You can even decide if you will use before-tax or after-tax income to pay for the annuity. It's never too late to investigate your options and see if an annuity is the right financial approach for your retirement. Our expert insurance brokers will be happy to assist you in selecting the best combination of annuity types to meet your needs.
Saving for your retirement can be a daunting task. You may be disciplined enough to put aside a portion of your income each month, but what is the best way to make that money grow? Consider an annuity in addition to your IRAs and 401(k)s.
There are a number of reasons why annuities are such a popular choice for individuals looking to save for retirement. For most retirees, their greatest concern is outliving their assets. Savings within an annuity can be converted into a series of steady income payments (called annuitizing your contract). You can elect to receive these payments for a set time period, or can choose a guaranteed income for life, a feature only available in annuities. Inflation is another factor affecting whether you will have enough income to live on throughout your retirement. With an annuity, your earnings accrue tax deferred, allowing your savings to work harder for you to help fight inflation.[1] Also, with some annuities, you can take advantage of current favorable interest rates by locking in a guaranteed interest rate for a specific period of time.
The death benefit provided by annuities is another lesser-known attribute. With an annuity, all death benefit proceeds pass outside of probate (if payable to a beneficiary other than the estate) so your beneficiaries avoid lengthy delays in receiving your bequest. Also, if your spouse is listed as the primary beneficiary, they may have the option to assume ownership of the annuity, enabling them to continue to accrue earnings on a tax-deferred basis.
So what exactly is an annuity? An annuity is a contract with an insurance company where you deposit money into the annuity and receive payments beginning sometime in the future at regular intervals. There are several types of annuities to meet your needs.
A fixed deferred annuity enables you to make a single lump sum deposit, or several contributions over time, with the option of receiving payments beginning at a specific date in the future. This annuity option is best for saving money over the long-term towards retirement.
A fixed immediate annuity is the same except annuity payments begin right away or within a short time after a lump sum deposit is made. This annuity option is best if you wish to convert existing savings into a guaranteed income stream right away.[2]
There are other types of annuities that offer variable investment divisions, such as equities, bonds, etc. Variable annuities also allow your earnings to accrue tax deferred. This type of annuity would be more appropriate for individuals looking for potential higher returns, but who are also willing to take a higher risk to achieve that goal.
In short, the benefits of annuities are numerous and an annuity may provide you with the exact type of savings vehicle you need in order to plan for your future. Contact us today with questions or for help in finding the right type of annuity to meet your future retirement goals.
Withdrawals of earnings are subject to ordinary income tax and, if taken prior to age 59½, may be subject to a 10% federal tax penalty. Your annuity contract may be subject to a contingent deferred sales charge (CDSC).
[1]If you are purchasing an annuity to fund a tax-qualified retirement plan (IRA, SEP, SIMPLE IRA), you should be aware that this tax deferral feature is available with any investment vehicle and is not unique to an annuity. Carefully consider the features and benefits of the annuity in making the decision to purchase it.
[2]Guarantees are based on the claims-paying ability of the issuing insurance company.
Guarantees and payment of lifetime income are contingent on the claims paying ability of the issuing insurance company.