Let’s be real. It can be hard to save for retirement. But, after you figure out how much you need to save for retirement, the real work begins.
Obviously, there are a lot of ways to save for retirement. Your main options are 401(k)s through your employer and individual retirement accounts (IRAs). But, there are also annuities.
With an annuity, you can grow your retirement savings portfolio in a unique way. Essentially, an annuity is a hybrid between a retirement account and an insurance policy that offers several ways to grow your money. Due to their advantages, annuities are becoming increasingly popular to supplement retirement income.
Helps You Meet Your Retirement Goals
“Employer-sponsored plans such as a 401(k), 403(b) or Keogh are an important part of planning for retirement,” states the Insurance Information Institute. Also, IRAs and these plans have contribution limits. And. the income you need to retire may not be enough to cover your expenses. This is especially true for people who began saving for retirement late or whose contributions were interrupted by job changes or family responsibilities.Income from Annuities Can Be Guaranteed and Predictable
People are living longer these days. For example, when two people are age 65, there is a 50 percent chance of one of them living to age 92. The chances for one spouse to live to age 97 are 25 percent.In other words, your retirement could last up to 30 years—if not longer. And, as a result, your money will need to last longer.
What’s more, it may not be enough to follow traditional retirement strategies. In spite of saving diligently for retirement, you might want to consider another type of income source, such as an annuity—even though you’re eligible for Social Security. Most annuities offer a guarantee of retirement income for the life of the annuitant.
Provides Premium Protection
What exactly is premium protection? Simply put, it means you’ll always get your purchase payment back. In other words, you will never lose the money you invested.Whatever kind of fixed annuity you choose, the initial investment is safe. The advantages of fixed-indexed annuities include premium protection during market downturns, as well as the potential for investment growth during market upturns. This means you can make money (within certain limits) without any risk of losing it.
Annuities Can Grow Your Money faster
You want to let your money grow before retiring. With an annuity, you get tax-deferred growth. Plus, interest isn’t taxed until you take it out.Further, you can compound all of your interest or investment earnings this way. It is important to understand that annuities bought in IRAs or other tax-deferred accounts do not offer you any extra tax advantages. Earnings and income already go into the account tax-deferred.
It’s Up to You When You Receive income
You can choose when to start receiving annuity payments. In most cases, you don’t even have to decide in advance. In short, you can decide what will benefit you the most. Whether you need income today or in the future.- Immediate annuity. This type of annuity starts paying after one to 13 months of an initial premium.
- Deferred annuity. This is an annuity that pays out in the future, like 20 years from now. You can pay with a single premium, multiple premiums, or regular contributions.
You Can Contribute However Much You Want
IRS-mandated contribution limits do not apply to non-qualified, tax-deferred annuities. IRAs and 401(k)s, however, are examples of tax-deferred retirement plans with limits. As such. if you’ve maxed out 401(k) or IRA contributions and want to save more in a tax-deferred vehicle, an annuity could be a good choice.Another potential advantage with annuities? You can allow your annuity to continue growing for as long as you wish.
Your Portfolio Can Be More Stable with Annuities
Bonds are a major source of retirement income for most retirees. That doesn’t mean something can’t be improved just because it’s always been done that way.Right now, you can thank annuities. A good annuity can add portfolio stability, regardless of how long you need it. And it can provide a reliable income stream when you retire.
In most annuities, the income is fixed no matter what happens in the stock market. The same can’t be said about bonds, and even less about portfolio “drawdowns”.
Wade Pfau, a known expert in the retirement income arena, calls annuities “actuarial bonds.” This is because, even with bond funds, annuities may improve retirement outcomes.
Keeps Up with Inflation
As you know, with a guaranteed lifetime income plan, you can secure a reliable income stream for life. You might worry, though, whether your lifetime income will support your current lifestyle as costs rise as you retire.Let’s say you have $3,000 in monthly costs right now. They’ll be around $4,000 in 10 years with just 3 percent inflation. Your monthly expenses will have more than doubled to about $6,200 after 25 years at that low inflation rate.
Tax-Advantage Retirement Saving
The only tax-deferred investment available without joining an IRA or retirement plan is an annuity.Protection from Bankruptcy and Creditors
Certain states don’t let creditors or bankruptcy courts seize annuities. In states like Florida and Texas, creditors cannot seize money held in an annuity or cash value life insurance policy.In these two states, these statutes protect retirees who live in them and rely on annuities to live comfortably.
What about the rest of the country? In some cases, you’re exempt from seizure. However, some states don’t protect annuities from creditors.
Long-Term Care Insurance
In many annuity contracts, long-term care riders are available. As a result, you are protected from the costs of long-term care if you require it.Provides an Inheritance for Beneficiaries
You can pass on the value of your annuity directly to your beneficiaries with most annuities. It usually doesn’t go through probate either. Alternatively, you can specify that a beneficiary will receive a lump sum or a guaranteed income for a certain period.- When you die, the account value or
- Contributions to the annuity (adjusted for any prior withdrawals).
Annuities Are Customizable
There is no one-size-fits-all approach to annuities. And, that’s why you have a number of options with which to choose. There is a wide range of products available, from those that focus on growth potential to those that promise a steady, guaranteed income in the future.Frequently Asked Questions
1. How do I Know if Buying an Annuity Will Be Right for Me?
Generally, you should only consider an annuity after you’ve exhausted other tax-advantaged retirement investments, like 401(k)s and IRAs.2. Which Type of Annuity is Best?
That depends.If you don’t like taking risks and like predictability, fixed annuities might be a good option.
You might consider fixed index annuities if you’re comfortable with the potential upsides, but are wary of the potential downsides.
3. What Is the Best Annuity for Retirees?
With so much competition in the annuity market, you have plenty of options when choosing a provider or company. So to make it easier on you, we picked the five best annuities for retirees.- Due. Thanks to Due, annuities are a lot easier to understand. With this fixed annuity, you can contribute however much you want. And. your money will earn a fixed interest rate of 3 percent.
- Fidelity. Considered an annuity leader, Fidelity offers six types of annuities. You can pick from retirement income, asset protection, or income plans. Fees are usually low, and A+ AM Best rates them high.
- Mass Mutual. The company has been offering annuities since 1857. We like RetireEase the best out of all the insurance Mass Mutual has. This is a premium deferred annuity. Payments are monthly, quarterly, semiannually, or annually, and there’s no annual fee.
- New York Life. Here’s another experienced leader with a solid rating from AM Best. As well as variable and fixed annuities, New York Life offers income annuities. New York Life’s biggest draw is that you can buy an annuity for $5,000.
- AgeUp. Unlike other annuity companies, AgeUp caters to seniors. If you’re approaching your 90s and worry about outliving your retirement savings, this is the perfect vehicle for you.
4. What Are the Cons of Annuities?
Every financial product has its disadvantages, and annuities are no different. Some annuities charge rather excessive fees, for instance. And, annuity contracts can be complex.5. How Much Does an Annuity Cost?
Annuity prices vary based on the type you choose. Annuities, no matter what kind you get, aren’t cheap. Mainly this is due to commission fees. These fees can be anywhere from 1 percent to 10 percent of the contract value. Additionally, there may be administrators’ fees and a mortality expense risk charge. And, there’s a surrender charge and tax penalty if you make a withdrawal before the age of 59 ½.Even so, payout annuities and fixed indexed annuities don’t charge any fees. A fixed-rate annuity typically costs less than a variable-rate annuity.
