By Paul McCoy, CIMA®, AIF®
From setting aside a portion of your earnings each year to investing for a long-term horizon, saving for retirement is a fairly straightforward concept. Once you reach your retirement date and begin drawing income from your savings, however, things begin to feel more complex and, at times, uncertain.
Annuities can provide longevity insurance by protecting against outliving your savings. Options include life annuities, providing an income stream throughout your retirement chapter, and joint annuities, providing both you and your spouse payments for the remainder of your lives.1 The first step is to determine whether an annuity is right for your lifestyle and circumstances.
Address Your Retirement Portfolio Needs
Implementing an annuity into your retirement portfolio can aid in reducing your likelihood of running out of money. While the benefits improve with longevity, value exists throughout the addition of an annuity.
Annuities can also address strategic needs in your retirement portfolio. For example, a Qualified Longevity Annuity Contract (QLAC) is purchased inside a qualified retirement account and up to certain limits, the money used to purchase a QLAC is exempt from your Required Minimum Distribution (RMD).2
Weigh the Pros and Cons
With a variety of annuity options available, it’s important to consider the advantages and disadvantages of each. Generally, the more straightforward the annuity, the less costly it is, but it’s difficult to establish a definitive pros and cons list across the board. This is because it depends largely on the individual purchasing the annuity and the circumstances of their financial picture.
Tax treatment is one advantage of most annuities. Until you begin receiving payments, annuity premiums continuously grow tax-deferred. Alternatively, annuities maintain the disadvantage of keeping your principal investment under lock and key for several years.3 This is unless you sell your annuity payments at a discount - an option available if you have a sudden and urgent need for cash.4 If you do choose to surrender your policy within the surrender period (typically within five to eight years of purchasing the annuity), you'll likely be responsible for paying a surrender charge. In addition, withdrawals from your annuity before you reach 59 1/2 may be subject to a 10 percent IRS penalty, in addition to regular income tax.5
Choose the Best Annuity for You
At the end of the day, the decision to purchase an annuity is incredibly personal as every individual’s financial situation is unique. It’s important to clarify your needs and goals in addition to evaluating your comfort level with risk as you decide if an annuity is right for you.
Establishing how close you are to retiring and understanding the lifestyle changes that come with retirement and the loss of steady income are a few important factors to keep in mind for anyone preparing for this next chapter. Even further, clarifying if you want a reliable income for life with little risk and low costs will help you determine if a fixed annuity is the best option for you. Alternatively, a variable annuity might be suitable if you’re comfortable with risk in exchange for the possibility of higher returns.6
Simplify the Complex
There’s no doubt that annuities can be complicated, which is why it’s important to discuss your needs with a professional. This will help you evaluate your retirement portfolio and further understand your financial options.
Take your time in understanding the details of your annuity contract, including associated fees and commissions, and don’t be afraid to ask for more than one quote to compare your options. Lastly, take into consideration the reputation of the company you’ll be working with, ensuring that they comply with annuity regulations and are financially sound.
Your retirement chapter is within reach. Don’t let your stream of income stop you from achieving it confidently.
This content is developed from sources believed to be providing accurate information, and provided by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.