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March 16, 2016
So, if you have enough to invest, lifetime annuities really can provide you with enough money to live securely in retirement.
One of the main reasons why so many people avoid annuities is the fact that so much money is tied up in them, and there is no real guarantee that you’ll ever see the benefit. While that’s true with all annuities, you might consider a different mindset. Annuities are literally insurance products, and, as such, they give you security.
Katharine Abraham, director of the Maryland Center for Economics and Policy at the University of Maryland, 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.
When you think about annuities with an insurance mindset (versus an investment mindset), you might feel freer to take more risks on higher-yield investments.
According to Kiplinger, deferred-income annuities are a newer product that are designed specifically for traditional IRAs, 401(k)s, and other tax-deferred retirement plans. says Kiplinger. And 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% of what’s in your IRA or 401(k), with a cap of $125,000, in a QLAC or Qualified Longevity Annuity Contract. You also don’t have to take Required Minimum Distributions (RMDs) on it at age 70.
The way that it works is that you invest between ages 60 and 65, and you 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.
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 lets you model the purchase of an annuity (as well as hundreds of other retirement financing options).
Probably the biggest drawback of an annuity is losing access to all of the money that you invest. You also 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 because annuities 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% and 6% 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% annually. That begins at age 65 and lasts throughout your lifetime. If you have a joint-life plan, you can withdraw 4.5%.
Annuities have had a reputation for being both safe and dangerous 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 they are even a good option for you. The NewRetirement retirement calculator lets you try out an annuity. You can get instant feedback about how the purchase of an annuity would impact your cash flow, savings needs, estate, and more.
While there are pros and cons to getting an annuity, this calculator shows you your own personal advantages and disadvantages.
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