What You Should Know
If one of your financial goals is to maintain your
current standard of living after you retire, you
should take steps now. Annuities are useful
financial tools that can help you achieve your
retirement saving and income goals.
This article contains information to help you
understand:
- How annuities work.
- How to select the right annuity features.
- How to purchase an annuity.
What Is An Annuity?
An annuity is a contract between you and an
insurance company. It can be part of a
long-range retirement plan. It has three stages:
start-up,
accumulation and payout. When you
purchase an annuity (start up), you pay the
insurance company an amount of money, either in
a lump sum or series of payments. Your money has
the potential to grow tax-deferred over time
(accumulation). In the final stage (payout) you
have options depending on how you want to
receive the money in retirement. The options
include lump-sum payment or an income stream
that cannot be outlived.
What Are The Benefits Of An Annuity?
- An annuity can provide something no other planning tool offers — the potential for lifetime income.
Annuities are designed to protect you from
outliving your savings.
- When an annuity is owned by an individual, all earnings are tax deferred for current federal income taxes.
In other words, earnings are taxed only when you take money out of the annuity. Over time, tax deferral, combined with the benefits of compounding, may help your money to grow faster.
- Annuities offer a wide range of withdrawal and payment options, so you can tailor a plan to fit your needs.
You may choose a lump-sum withdrawal or a series
of periodic payments, with payments beginning
immediately or at a future date.
What Is The Financial Role Of An Annuity?
You may be concerned that financing your
retirement will be more expensive than you
imagined — and, like many individuals, you
may be facing crucial investment decisions that
will affect your future lifestyle. For example,
some employers are eliminating or reducing their
contributions to retirement plans. This means more
Americans are responsible for supplementing their
retirement income through careful planning,
investing and money management.
Even if you have substantial net worth, not all of your investments may be income-generating. For example, some stocks do not pay dividends. Even stocks that pay regular dividends may not provide enough money to live on.
Many individuals' primary real estate investment
is their home, but it generally will not produce
regular retirement income, either. You might be
able to arrange a reverse mortgage or secure a
loan against your equity, but these options will
reduce the value of your equity.
Many individuals find it useful to sell non-income
producing assets and then use the money to
purchase a financial product. Annuities can
provide income guaranteed to last as long as you
live. If you are planning for the future or
already living in retirement, an annuity can help
ensure your financial security in the years ahead.
Who Should Own An Annuity?
An annuity can fill the retirement income gap if you:
- Contribute the most you can to employer-sponsored retirement plans
such as 401(k) or 403(b) plans and need to save more for retirement.
- Have already contributed the maximum to a Roth or Traditional IRA — or
your adjusted gross income prohibits you from contributing to such accounts.
- Already have investment or savings accounts that quickly can be converted to cash.
- Need to generate a guaranteed, steady retirement income.
- Need to ensure a steady income for your spouse or another beneficiary after your death.
- Expect to be in a lower federal income tax bracket in the future.
- Want protection, safety and guarantees for your money.
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Many experts suggest a retiree's fixed expenses in
retirement should be covered by a guaranteed
source of income, such as Social Security or a
defined benefit pension. An annuity can fill the
gap.
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Topics covered in this section are:
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Basic Money Management
Basic Money Management