Across the country, people are saving for retirement. It is true that many people lag behind when it comes to setting aside funds for the future, but despite this lag – where the typical couple aged 56-61 has only $17,00 set aside – there are many options available. Employer-sponsored plans, Individual Retirement Accounts (IRAs), and even stock/bond or real estate investments represent some of the most popular and proven ways to prepare for retirement. One commonly-overlooked option is that of the annuity. In this guide, we’ll share information on what annuities are, how they work, and how they can supplement other retirement savings plans. In short, everything you need to know to make an informed annuity purchasing decision will be presented. Let’s get started. What is an Annuity?Perhaps you have heard the term “annuity”, but do not truly understand what they are or what they can do for the retirement savings portfolio. In simple terms, annuities are a type of insurance policy that pays out an income, and remain a popular choice for investors who wish to receive a steady stream of income in their retirement years. The way an annuity works is that the investor chooses an annuity product, then invests in it. Depending on the setup and type of annuity, the annuity then makes payments to the investor in the future. Income payments may be chosen to be distributed monthly, quarterly, annually, or even in a lump sum if desired. The size of the income payments depends on the amount originally invested, the account value’s growth, and the length of time premium payments were made into the annuity. There are two major categories of annuity, and within those categories are two forms:
A fixed annuity offers a guaranteed payout amount and rate of interest, which is specified in the annuity contract/policy. A variable annuity is tied to the performance of the investments associated with the policy. Fixed annuities may generate higher returns on a tax-deferred basis, depending on the investment performance, while variable annuities fluctuate in value with market performance. It is also important to note that the funds contained in an annuity are not protected or insured by the issuers, although most have some form of minimum guaranteed payout figure in the contract details. What are the Drawbacks to Annuities?Annuities are a good choice for many people who wish to diversify their retirement savings plans. They can produce a steady, reliable stream of income after retirement, and therefore help to cover the expenses retirees face after they’re no longer working. Still, annuities aren’t for everyone. For those receiving Social Security benefits, they are already in possession of a fixed indexed annuity, designed to pay benefits for the rest of the person’s life. People with government- or corporate-sponsored pensions also already have an annuity that makes regular payments for the remaining life of the individual. Other drawbacks include the potential for substantial annual maintenance fees, which can be as much as 3-4%. Also, there are surrender penalties for early withdrawal from certain annuity accounts, particularly those that are the deferred type. To avoid these penalties, annuity policyholders must sometimes wait 15 years or more for the policy to mature before becoming eligible to make penalty-free withdrawals. Reasons for Purchasing AnnuitiesNow that we understand what annuities are and how they work, and have a clear picture of some of the potential drawbacks, what are the upsides to purchasing an annuity? There are several reasons, and these depend on both the type of annuity purchased and the stage of life the individual making the purchase is in.
As with any retirement account, determining if an annuity is right for an individual’s unique retirement needs and goals can be filled with challenges. Speak to a retirement planning professional to gain insights into annuities, including whether a fixed or variable annuity can help you meet your goals. A comfortable financial life after retirement is possible with the steady income and guaranteed payouts of an annuity. Contact Synergistic Life Services for help today: www.synergisticlifeservices.com from https://geoffreyjthompson.wordpress.com/2018/11/09/pros-and-cons-annuities-in-retirement-savings-plans/
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AuthorGeoff Thompson is a financial and retirement analyst. Archives
November 2018
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