Basics of Annuities for Retirement

Once you head into retirement, reliable income becomes increasingly important. Without income from a job, planning becomes a little more precarious. This is one of the reasons that annuities are sometimes popular among retirees.

Annuities have a somewhat bad reputation, and some annuities are poor choices. However, with the right information, it’s possible to find an annuity that will meet your needs and provide you with steady income during your retirement. Here are the basics of annuities for retirement:

Single Premium Annuity

A single premium annuity is also called an immediate annuity. With this type of annuity, you pay one premium, at one time, and the regular payments start immediately. You can choose from a number of options for your payout, including:

  • Lifetime payout: You receive a regular payment (many retirees choose monthly payments) until the end of your life.
  • Certain period: You can choose to only receive payments for a set period of time. With this option, you are likely to get a higher payment, but you run a greater risk of outliving your money.

There are also payment options that include payouts for a surviving spouse, or options for distributing some of the remaining money to heirs. This type of annuity is one of the most popular annuities for many retirees. It’s possible to use the money from an amassed nest egg to purchase an immediate annuity when you retire. One strategy is to purchase an annuity using a portion of your nest egg, and keep the rest in a portfolio of diversified investments.

Variable Annuity

Unlike a single premium annuity, which is often fixed, the variable annuity offers payouts based on how well certain investments do. In many cases, you can choose which investments are involved with an annuity. In many cases, cash and cash-like investments are preferred. Bonds are also popular choices for investments with variable annuities.

The main advantage of a variable annuity is that there is the potential for you to see capital growth as part of your annuity. When choosing this annuity option, you often start paying in prior to retirement. You can choose to make smaller payments, rather than purchasing the annuity with a single lump sum. Your payout in retirement depends largely on how much you’ve put in, as well as how well the investments have performed.

With a variable annuity, you run the risk of investment loss. On top of that, your capital gains can be taxed at ordinary income rates when you withdraw the money. Your money grows tax-deferred in an annuity, but you eventually have to pay taxes on your gains. This means that you run the risk of missing out on favorable tax rates seen with long-term capital gains.

If you have maxed out other tax-deferred investment accounts, a variable annuity can provide you with another tax-sheltered vehicle. Additionally, if you can handle the risk, you might like the potentially higher payout. But you run the risk of not having an adequate payout.

Variable Annuity with a Guarantee

One way to reduce the risk associated with a variable annuity is to choose an annuity with a guarantee. This type of annuity comes with a guaranteed income rider, setting a baseline for your payout, and promising the potential for a higher payout.

With this type of annuity, there is a potential for a bigger payout than you would see with an immediate annuity, but you probably won’t see the same level of payout that you could with a “regular” variable annuity without a guaranteed income rider. This type of annuity claims to offer the best of both worlds. However, you need to be careful, since there can be a number of issues in the fine print. 

Caveat Emptor-Buyer beware!

Guarantees in recent years aren’t nearly as good as what was offered 10 years ago. These products are also notoriously expensive.

Research the Annuity Possibilities

Before you choose an annuity, it’s important to understand what you are getting. Sometimes, annuities can be complex and come with a number of fees and tax issues that can reduce your overall gains. Look for an annuity that is clearly explained, and offers what you most need for your situation. A knowledgeable financial professional — who isn’t earning a commission based on your annuity choices — can help you understand whether an annuity is right for you, as well as what strategy you can employ to ensure that you make the most of your money while achieving financial security.

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investing for retirement ebook ipad - McClain Lovejoy
investing for retirement ebook ipad - McClain Lovejoy
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