Annuities — Can They Provide Enough Money for You to Live Securely in Retirement?
Annuities often get a bad rap, but maybe that’s not entirely fair. While some advisers love them, just as many, probably more, warn against them. But there are a lot more options than there used to be, and more ways for you to find a policy that suits your plans.
No one should set all of their eggs in any single basket, and that’s just as true for annuities as anything else. But with a good balance and the right annuity, you might find a comfortable, safe, and even flexible retirement plan that keeps you financially secure through every phase of retirement.
Annuities are insurance products that guarantee income. You pay a lump sum and — in return — get guaranteed monthly payments. Lifetime annuities guarantee that income for life — no matter how long you live.
So, if you have enough to invest, lifetime annuities really can provide you with enough money to live securely in retirement.
Annuities might be ideal for you, but always read the fine print.
Think About Annuities Differently
One of the main reasons why so many people avoid annuities is the fact that so much money is tied up with no real guarantee that you’ll ever see the benefit. While that’s true with all annuities, try out a different mindset. They’re insurance, literally, and as such, they give you security.
University of Maryland’s director of the Maryland Center for Economics and Policy, Katharine Abraham, tells Kiplinger that insurance should be the default way to think about annuities. They aren’t investments, in her view, but policies that protect you from running out of money later in life.
With the insurance versus investment mindset, you might feel freer to take more risks on higher yield investments. That’s according to Brett Wollam, Fidelity Investments Life Insurance senior vice president.
There’s Something New in Annuities
Aside from a different mindset, there’s something really new in annuities. Deferred-income annuities are a newer product that’s designed specifically for “traditional IRAs, 401(k)s and other tax-deferred retirement plans,” says Kiplinger. A new Treasury rule allows you to place deferred-income annuities in one of these plans, where before that wasn’t possible.
The new rule allows you to invest as much as 25 percent of what’s in your IRA or 401(k), with a cap of $125,000, in a QLAC or Qualified Longevity Annuity Contract. You don’t have to take Required Minimum Distributions (RMDs) on it at age 70.
The way that it works is that you invest between age 60 and 65 and get a guaranteed, good-size payment arrangement that’s set to begin in 20 years. And the length of your deferral period can make a big difference in those payments. Golden Retirement Advisors president, Jerry Golden, tells Kiplinger that even more new products will likely enter the market soon.
To know if you might benefit from a deferred-income annuity, you might want to try a retirement calculator that tells you how long your money will last. The NewRetirement retirement calculator is a detailed and easy to use tool that also let’s you model the purchase of an annuity (as well as hundreds of other retirement financing options).
A withdrawal option eases one of the biggest annuity fears.
Guarantees Sweeten the Annuity Deal
Probably the biggest drawback of any annuity is losing access to all of the money that you invest. Add to that the possibility that you might not live to enjoy the payouts, and it’s not the happiest sort of way for you to spend your earnings. That’s where a variable annuity with income guarantee comes in. Just read the fine print carefully, says the New York Times, as these can be complex financial products.
A variable annuity gives you two accounts that run parallel, says Kiplinger. You have your investment, and you also have your benefit base. Your investment goes into mutual funds, and your benefit base is “guaranteed to grow,” usually between 5 – 6 percent, annually. That’s true, even if your investments don’t fare as well.
The kicker is the withdrawal option. You can withdraw from your benefit base growth, up to about 5 percent annually. That begins at age 65 and lasts throughout your lifetime. If you have a joint-life plan, you can withdraw 4.5 percent.
Annuities have had a reputation as safe and dangerous, both at the same time. While the insurance has always had payment guarantees, what no one could predict was whether your life situation would fall inside those parameters. And there’s also been the pesky tied-up money issue.
New annuity options give you a lot more to choose from. It’s still a later-life retirement income, but now you have a lot more options. You can invest your tax-deferred income, and you can even make withdrawals a lot sooner, depending on which annuity that you buy.
NewRetirement can help you determine which type of annuity is right for you, or whether you want one at all. The NewRetirement retirement calculator let’s you “try on” an annuity. You can get instant feedback about how the purchase of an annuity would impact your cash flow, savings needs, estate and more… There are pros and cons to getting an annuity, this calculator shows you your own personal advantages and disadvantages.