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September 15, 2020
If you are worried about paying for retirement, it is worth evaluating the pros and cons of annuities.
An annuity is an insurance product that pays out income. You make an investment in the annuity and then it makes payments to you, giving you a dependable income stream during retirement.
Annuities offer some considerable benefits over other kinds of retirement investments, especially for those not able or willing to risk losing a portion of their retirement savings to stock or bond market swings.
The pros of annuities include:
Social Security and pensions offer a similar form of retirement income protection but in limited dollar amounts. The only limit to the size of your periodic annuity payment is the amount of money you have to purchase an annuity now. Even better for many retirees, the older you are, the larger your monthly payments will be for the same price.
In sum, an annuity is a great way to protect your quality of life in retirement. Your retirement assets can be efficiently used to purchase guaranteed income to last as long as you need it. Best of all, this income can be protected from inflation and other financial risks.
Despite the many advantages of annuities, they do have some downsides.
Some retirement financial planners recommend that people reserve at least 40 percent of their retirement assets for unforeseen circumstances. Because most annuities are designed to provide steady income over time, they are not ideally suited to cover large unplanned expenses.
(However, although undesirable, if circumstances require it, there are third-party companies that will exchange a lump sum payment for your fixed-income payments. In this situation you will likely end up receiving less than the amount you paid for the annuity.)
So, what do you think about the pros and cons of annuities for your retirement? Use an annuity calculator to estimate exactly how much income you can buy. Or, better yet, see how an annuity fits into your overall retirement plan by using the NewRetirement Retirement Planning Calculator.
This detailed tool will let you model an annuity in the context of your overall retirement finances. You can even try all kinds of different scenarios. What happens if you:
Though the basic concept of an annuity is pretty simple — you’re buying a stream of income — the many, many varieties of annuities can make figuring out which annuity product is right for you difficult. Here is a list of FAQs most people ask when shopping for an annuity.
Ratings indicate the relative financial strength of insurance companies. The two largest rating agencies, A.M. Best and Standard & Poor’s, use their own individual criteria to grade insurance providers. Because the federal government does not guarantee annuity products, prospective buyers should use these ratings to gauge risk.
The amount you will receive every month depends on a number of factors: your age, gender, state of residence, how much money you invest in the annuity, and what different insurance companies are quoting for their particular annuity products. (Different annuity insurance companies will quote different prices for the same product with the same features. It is important to compare annuity companies.)
Other factors that will determine how much income you receive include the type of annuity you specify (fixed annuity, variable annuity, tax-deferred annuity, indexed annuity, guaranteed variable annuity, etc…) and the features you apply to that annuity (asset protection, guaranteed principal protection, etc.)
You can use our Annuity Calculator to estimate the amount of money you will likely be able to receive from an annuity for a given set of criteria and investment amount.
Once you’ve purchased your annuity, it’s generally not possible to alter or accelerate payments. You can purchase more income within your plan at a later date, but you can’t elect to lower your payments for a refund of the principal.
Most plans require that you be younger than 80 years old to purchase an annuity.
No. Medical exams are not usually required to purchase an annuity.
That depends on your particular financial situation. We recommend that you speak with an independent retirement financial planner or other trusted advisor when you are evaluating an annuity.
Life insurance pays your beneficiaries a substantial cash benefit should you die during the term of the policy – essentially protecting them against the risk that you might die prematurely, placing them in financial jeopardy. Benefits from life insurance policies are designed to replace “lost” income; they usually provide significantly more than you’ve paid into the policy.
Annuities are completely different – they are designed to provide you with guaranteed income during retirement.
In most cases, you cannot terminate your annuity once you’ve signed up. Certain outstanding circumstances may, however, enable you to cancel and recover some of your investment.
Some annuities offer premium protection as a standard feature. With this feature, you or your beneficiary will continue to receive scheduled periodic payments until the cumulative payments equal your net investment, even if you die beforehand.
In states where a premium tax is levied on annuities, your net investment is your premium less the state premium tax. Some plans also offer an option that provides for a specified number of guaranteed payments to be made to your beneficiary in the event of your death. You can elect to opt for higher annuity payments each month by forgoing these options, but there’s no guarantee that you will recover all or part of your original investment.
Generally, it is recommended that you have at least $30,000 to put toward an annuity. However, each individual’s situation is unique.
Reputable annuity providers offer automatic cost-of-living-adjustment (COLA) as a standard feature. COLA will protect you against inflation.
No. Because annuities carry no cash value, performing a 1035 exchange (exchanging an insurance policy that you own for a new life insurance policy without paying tax on the investment gains) from an annuity to other products is not permitted. However, you can use a 1035 exchange to transfer funds into an annuity.
Yes. Funds from 401(k), 403(b) and other qualified retirement plans can be used to purchase an annuity. In such a case, you can roll the funds over into the annuity without forfeiting tax protection.
If you buy an annuity with non-qualified after-tax dollars, the Exclusion Ratio is the percentage of your lifetime income payments that you will not have to treat as income (for federal income tax purposes).
You can have your paycheck last for your lifetime alone or until both you and your spouse die.
You can set up your annuity so that if you die, your beneficiaries will receive payments for a particular period of time. Or, if your annuity contract has funds remaining after you die, your beneficiaries can receive them as a lump sum.
The larger your initial premium, the larger your paychecks will be. Ideally, you can purchase an annuity that will provide you with enough guaranteed income to cover your expenses in retirement.
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