Income for Life Retirement Series #7: Purchase an Annuity

At this point, we are at the halfway mark of our Income for Life series. The seventh strategy to help guarantee your money’s longevity is an annuity. When it comes to discussing annuities understanding what they are and how they work is critical. Annuities are complex vehicles for investing, so be sure you understand what you’re doing before you do it. Now having said that, let’s dive into what are annuities and how they can enhance your retirement income.

Fixed Income Annuities

Annuities come in various forms. Both variable and fixed annuities offer a necessary source of income for life. One such product that could affect product you may want to look into is an immediate fixed annuity. Studies have proven that having a fixed immediate annuity as part of your retirement income program may increase the likelihood your retirement income continues for the duration of your life. An immediate annuity means you give an insurance company a lump sum in exchange for a monthly check. Typically that money will last for the rest of your life. Once you die, the money stops. However, it is possible to get an annuity which has survivor benefits so your spouse will continue receiving payments after your death. Nonetheless, you pay for this security by accepting smaller monthly premiums while you are alive.

Deferred Income Annuities

Another choice is a deferred-income annuity that you buy in your fifties or sixties. You won’t see a payment on those particular annuities for at least a decade. The longer you wait, the larger your monthly check will be. Naturally, if you die before the payments ever begin, then you receive nothing—that is unless you chose a return of premium or survivor benefits. These products, also known as longevity insurance, shield you from the chance of outliving your savings.

A relatively new annuity added to the mix of deferred-income annuities is what is called a qualified longevity annuity contract (QLAC). It provides a nice tax advantage for retirees with a great deal of cash tied up in tax-deferred accounts for their retirement. These allow you to invest your 401(k) plan or traditional IRA up to 25% or $125,000—whichever is the lesser of the two—in a QLAC without taking the required minimum distributions when you turn 70½. However, payment must begin by age 85 in order to qualify for this special tax treatment.

Diversification

Remember, diversification is key—do not stash all your nest egg within an annuity. Most experts agree that you can utilize them for investing between 25-40% (and that’s even higher than I might suggest). Just calculate your basic expenses, food, shelter, taxes, etc. to see how short you fall with your Social Security benefits. Perhaps you only cover the expenditures and have nothing left to play with. If that’s the case, then purchase an annuity to help.

Again annuities are very complex in nature, talk with your planner before making any decisions. If you need more help understanding what an annuity is, then contact us. We will work with you help make sure your “Income for Life” is as financially simple as possible.