Although most people know they should plan for retirement, actually getting started is often easier said than done.
The process of creating a financial plan that covers both today and the distant future can feel overwhelming, especially for younger workers.
Leaving your future to chance could leave you short of funds later in life, so it helps to begin with a solid foundation. For guidance on building that foundation, see Planning for Retirement: Tips and Insights.
Think of your retirement plan like building a house: you do not have to finish it in one day, but you do need a reliable base. An annuity is one option that can serve as a steady foundation because it provides a long-term, predictable income stream during retirement.
Annuities have several features that make them a useful part of a retirement strategy. For example, unlike savings that can be exhausted, an income annuity can continue to pay for the rest of your life, which is important as life expectancies rise. To understand how annuities may fit into a broader plan, see The Role of Annuities in Retirement Planning.
Payout options
- Period certain: fixed payments for a specified number of years; if you die before the period ends, a named beneficiary continues to receive payments for the remainder of that period.
- Lifetime payments: payments continue for the remainder of your life.
- Lump sum: receive the accumulated value in a single payment.
- Period certain or lifetime: combines period certain and lifetime features and pays for the longer of the two.
- Joint and survivor: payments continue for the combined lifetimes of you and a spouse or partner.
Annuities can also be flexible in funding: you may purchase one with a single lump sum or with a series of contributions, and there are generally no contribution limits like those that apply to IRAs and 401(k)s.
There are tax considerations as well. Interest that accrues inside an annuity is typically tax-deferred until withdrawals are made, which can be beneficial if your current tax rate is higher than you expect in retirement.
Some annuity death benefits may be structured in ways that affect estate tax treatment; the exact tax outcome depends on the contract and applicable tax rules, so it is important to confirm details with a licensed professional.
If you want personalized help comparing options, consider talk to an agent who can review contracts and payouts with you.
* Annuity withdrawals are generally taxed as ordinary income and may be subject to surrender charges, in addition to a 10% federal income tax penalty if made prior to age 59½. The guarantees and payments of income are contingent on the claims-paying ability of the issuing insurance carrier.
Frequently Asked Questions
What is an annuity?
An annuity is a contract with an insurance company that can provide regular payments in exchange for a lump sum or series of payments.
How are annuity withdrawals taxed?
Withdrawals are generally taxed as ordinary income on the earnings portion, and early withdrawals may incur penalties and surrender charges.
Can I leave my annuity to my heirs?
Many annuities include a death benefit or beneficiary provision so remaining payments or a lump sum can pass to heirs, subject to the contract terms.