For many people, saving for retirement is their ultimate financial goal. There are several savings options, including IRAs, 401(k)s and more. Annuities are another popular financial vehicle for retirement.
In a nutshell, an annuity is a long-term investment in which a person makes either a one-time, lump sum payment, or regular purchase payments to receive income throughout their retirement. In other words, an annuity is a method of setting up a consistent stream of regular income for retirement through your contributions.
Annuities can be great options for retirement. Here are some of the most relevant benefits of annuities for retirement.
One of the best features of an annuity is that it can provide lifelong income through your retirement. Through lump sums or regular investments made pre-retirement, an annuity will set up a consistent stream of income for you through your retirement. You can choose to either start collecting on an annuity immediately or on a deferred basis. The income from your annuity basically replaces your paycheck.
Fixed or Variable Gains
An annuity is an investment product and as such, its value will accumulate over time. There are two major kinds of annuities that will appreciate at different rates. Fixed annuities appreciate by a fixed, determined rate each year so you always know exactly how much you will be getting. On the other hand, variable annuities can appreciate based on stock market returns. With variable annuities, there is more opportunity for growth, but also a tangible risk of losing money.
If you choose a deferred annuity (you start receiving money later rather than immediately), you can get a nice tax deferment on your assets. Like a traditional IRA, annuity funds will appreciate tax-free. The only time you get taxed is when you withdraw the money. Annuity disbursements are treated as normal income, so if you expect to have a lower income during retirement, then you can significantly reduce the overall amount you would be paying in taxes with an annuity.
Steady Income Stream
Annuities can provide a steady income stream through retirement – that, plus the guaranteed rate of return, can make sure you have steady, consistent income after you quit working. In many ways, getting an annuity makes more sense than funding your entire retirement through IRA accounts as you can better segment an annuity into regular disbursements. Like IRAs, annuities do have required minimum distributions that you have to start taking when you attain age 72.
Annuities are a different form of retirement income which may have some advantages over traditional retirement vehicles. Like with any kind of financial issue, the correct answer depends on your unique situation and preferences. At the end of the day, an annuity can be a good addition to your retirement portfolio and can serve as a steady stream of tax-deferred retirement income, in addition to any other retirement accounts and investment accounts you have.
With variable annuities, any withdrawals may be subject to income taxes and, prior to age 59 1/2, a 10% federal penalty tax may apply. Withdrawals from annuities will affect both the account value and the death benefit. The investment return and principal value will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. An annual contingent deferred sales charge (CDSC) may apply
A fixed annuity is a long-term, tax-deferred insurance contract designed for retirement. It allows you to create a fixed stream of income through a process called annuitization and also provides a fixed rate of return based on the terms of the contract. Fixed annuities have limitations. If you decide to take your money out early, you may face fees called surrender charges. Plus, if you’re not yet 59½, you may also have to pay an additional 10% tax penalty on top of ordinary income taxes. You should also know that a fixed annuity contains guarantees and protections that are subject to the issuing insurance company’s ability to pay for them.