In light of one of the worst recessions this generation has ever faced, it seems almost inevitable that employer-sponsored pension plans will fall by the wayside. It's kind of hard for a senior to see any type of financial comfort during retirement if there isn't a steady stream of reliable income from their pension plan, right? Not necessarily. Let's look at what an annuity is and what it has to offer.
What Are Annuities?
A fixed income annuity is a stable investment that provides a guaranteed steady stream of retirement income for the rest of the annuity holder's life. If your employer is one of the many that isn't offering a pension plan and you'd like to add to your nest egg, then you might consider a closer look at annuities.
There are several different annuity options. For those nearing retirement, a deferred income annuity might be attractive. With this type of annuity, you can make contributions during your working years and then begin receiving an income from the annuity upon your retirement. Alternatively, you could purchase the deferred income annuity after you retire using a lump sum of money. In this case, the annuity would be set up for your annuity income to start at an older specified age, such as 85 or so.
An immediate annuity is another type that's popular with retirees. You will pay a lump sum of cash to the annuity company when you purchase the fixed immediate annuity upon retirement. In return, you'll immediately begin to receive a guaranteed payment each month from the annuity company. How much you receive each month will depend on several factors - the current interest rate, how large the lump sum was that you used to buy the fixed immediate annuity, and your gender and age. As a general rule, the income amount will be greater the older you are. In any event, the payment can be set up to continue for only a certain period of time or for the remainder of your life. A portion of the payments will be considered a tax-free return on the principal amount.
What Are the Advantages of Annuities?
- Emergency-related withdrawals without penalty
- Ability to control money in the event your circumstances change
- Most states protect funds from creditors
- Probate-free death transfer
- Ability to convert funds to a guaranteed lifetime income
- Safe investing
- Tax-deferred status until a withdrawal is made
One of the most appealing elements of a fixed annuity is that, much like a pension plan, it offers retirees a steady, fixed, and guaranteed monthly income. In other words, the consistent monthly payment will never change. The unyielding stability and predictable growth of fixed annuities are benefits that an up, down, and all around unpredictable stock market investment will never hold.
Current life expectancy estimates give a healthy 65-year-old male a 24% chance and females a 35% chance of at least living to 90-years-old. Great news unless you're one of the many seniors outliving their retirement savings. Considering these statistics, fixed annuity payments can help you fill any gaps left from other forms of retirement income, such as Social Security, that most likely won't sufficiently cover your expenses for your entire remaining lifetime.
There are also some tax advantages with annuities. The earnings from your fixed annuity will be tax-deferred. This is advantageous because the tax-deferred interest dollars will remain within the investment and continue earning for you instead of being paid to yearly federal and state taxes. However, do keep in mind that there will be a set withdrawal term. You'll only be taxed on earned interest once you've made a withdrawal from the annuity.
Yet another advantage is the safety of an annuity. Safe investments like annuities have become increasingly popular in relation to the global economic uncertainty seen in recent years. Compared to the stability of many other entities like brokerage firms and banks, U.S. insurance companies have a long-standing record of being stable. Insurance companies have remained stable as others failed mainly due to their conservative low-risk investment opportunities and reliable protections to guard against insurance policyholders losing their principle investment dollars.
In summary, as you can see, a lot of the benefits of a fixed annuity are actually comparable to traditional pension plans. Our experienced financial planners can help you make your own pension plan through an annuity.
*Liquidated earnings are subject to ordinary income tax, may be subject to surrender charges and, if taken prior to age 59 1/2, may be subject to a 10% federal income tax penalty.
Guarantees and payment of lifetime income are contingent on the claims paying ability of the issuing insurance company.