Retirement planning seems to become more complex all the time. The more you learn, the more you know that there’s always something else to learn. Such might be the case with investing in annuities.
If you’re not familiar with annuities, you can think of them as a type of retirement insurance. You pay in before you retire, and the insurance pays out to you when you need it — after you stop working.
Every type of retirement savings option has its benefits and drawbacks, but annuities have some important upsides. Here are 5 that you should consider:
Upside #1: Your Taxes are Always Deferred
Like some of the other retirement options, such as 401(k) plans, annuities are tax deferred. This means you can save, but you won’t owe any taxes until later. But it gets better. According to Investopedia’s “Introduction to Annuities: Advantages and Disadvantages,” annuities are actually the only retirement savings option that is always tax deferred with no exceptions.
Upside #2: There’s No Annual Limit on Contribution
Saving as much as you can becomes a little more important every year. Unfortunately, plans such as IRAs limit how much you can save in any given year. The amount increases as you approach retirement, but with annuities it’s different. CNN’s “Ultimate Guide to Retirement” explains that annuities carry no limit on how much you can save, so you can catch up if you haven’t saved enough or you can pad what you’ve already got.
Upside #3: You Can Have a Guaranteed Payout
Regardless of which type of “life payout” annuity you have, you will receive payments for as long as you live. Life payouts are only one type of annuity payout option that you can choose from. But all life payouts make payments to you for life, even if the annuity is depleted before then.
Upside #4: There are Payout Choices
Flexibility in payouts lets you choose how you want to receive your money. You can choose to receive your payout as a lump sum, or in regular payments. If you choose regular payments, you still have more options. There’s the life payout, and there are also options that make payments to you for a certain number of years, says CNN Money.
The benefit of choosing payments for life is that you’ll have a regular income that you can count on. The benefit of choosing payments for a set number of years is that you won’t risk leaving money in the annuity when you die.
Upside #5: Freedom from Estate Probate and Creditors
No matter where you live, annuities are exempt from probate and from creditors, says Investopedia. You might wonder why that matters, considering that most annuities end when the annuitant dies or when the annuity is depleted. But there are some annuities that transfer any remaining balance to a beneficiary when the annuitant dies. In those cases, exemption from probate and creditors is vital.
While you wouldn’t want to place all of your retirement savings in an annuity, they are a valuable tool for retirement planning. Fees for early withdrawal can be extreme, and choosing and managing annuities is a complicated matter. For example, Investopedia explains that annuitants can’t take withdrawals before age 70 1/2 unless they’re prepared to pay a whopping 50 percent penalty.
Achieving a balance between annuities and other investments is the smartest way to approach them. You can create a steady, dependable income with an annuity, and you have several payout options. And if you supplement your retirement portfolio with other investments, you’ll have a better shot at covering almost everything that life might decide to send your way.
Learn more about the pros and cons of annuities or estimate your lifetime annuity income with the annuity calculator.
