For people in their fifties, it’s never too early to think about a retirement financial plan. Even if you are starting a bit late in the game, now is an excellent time to catch up on planning.
However, so many investment, fixed-income, and insurance products are on the market. Like other investors, you may find it challenging to create strategies that meet your needs for safety and income.
Of the many options, annuities may be on your radar, but you may have heard bad things about them too. How can you judge if they are right for your financial situation?
To get started, learn about some scenarios where annuities can help people achieve their retirement money goals. Here are some things to consider when you are thinking of buying an annuity.
Know the Annuity Type You are Considering
Before discussing potential annuity uses, it’s important to understand basic annuity types. Let’s focus on the two primary types of annuities: fixed annuities versus variable annuities. Some key differences are:
- In a variable annuity, you can choose to put your money directly into stocks, bond funds, commodities funds, or other market-based options.
- Because variable annuity money goes directly into these markets, the money is subject to market risk. The trade-off is higher growth potential for your money.
- Unlike variable annuities, fixed annuities don’t carry market risk.
- Depending on the fixed-type annuity you choose, an insurance company may offer a certain interest rate over time, or your money may grow at interest rates based on positive increases in an index.
- With fixed annuities, your principal and earned interest will remain safe. The trade-off is lower growth potential, as when an index goes down, no interest is credited to your annuity.
- Also, the annuity will probably come with caps or other limits on how much interest you can receive.
- Compared to variable annuities, fixed annuities tend to have low or no fees.
So, to put it simply, fixed annuities generally offer more safety than variable annuities. Typically, retirement planning aims to reduce risks and produce dependable income, so fixed annuities will be the focus here.
What are Some Situations When Annuities can Help in Retirement?
While this isn’t an exhaustive list, here are some situations that annuities can help people reach their retirement goals:
Solving retirement problems with annuity guarantees. A primary function for annuities is as a transfer-of-risk strategy. Instead of shouldering potential pitfalls like longevity risk, market risk, and income risk, you can move more of these risk potentials to the insurance company. With their contractual guarantees upheld by an insurance carrier, annuities can be used for:
- Principal protection, or protecting your money from market investment risk,
- Income certainty, or generating a guaranteed retirement income that can last for a lifetime,
- Guaranteed growth, or growing some of your portfolio money with a minimum guaranteed interest rate,
- Long-term care, or getting an annuity with a long-term care rider (especially when other long-term care planning strategies aren’t available),
- Estate planning, or using an annuity with a death benefit rider for an efficient wealth transfer
A useful acronym to remember these potential guarantees for your needs is PIGLE. Also, annuities are the only financial product which can offer a guaranteed income, whether it’s for a set period or the rest of someone’s lifetime. If an annuity may solve some of these problems for you, a knowledgeable financial professional can help you determine if it’s well-suited for you.
Creating a wealth transfer for loved ones when life insurance isn’t available. Life insurance is a very efficient solution for leaving money to beneficiaries. After all, its death benefits proceeds are generally tax-free. But several people won’t be able to get life insurance for different reasons. Health issues or other conditions may affect insurability to the point where someone won’t be approved for a life policy.
If that’s the case, another way to give money to loved ones is through an annuity with a death benefit rider. Upon the annuity holder’s death, the insurance company will pledge to give the total amount of premiums paid to their beneficiaries. Some annuity death benefit riders will include earned interest as part of the death benefit payout. Because this is an annuity rider, though, it will likely be paid for with an additional fee, just like with life insurance riders.
Supplementing other retirement income sources. Because of the strength of their income assurances, annuities are often used by retirement planning professionals for fixed-income needs. Say someone wishes to supplement their income in retirement, which is often for lifestyle spending goals. Using various laddering and contract management techniques, annuities can be tapped as income growth strategies.
Basically, what this boils down to is carefully planning and buying annuities with different maturation dates. The annuity grows in value, and in due time it is switched with another annuity for further income growth. This can bring a number of advantages including:
- Enjoying more flexibility with multiple annuities instead of one annuity with a large sum in it
- Being able to enjoy contract benefits that weren’t found in prior annuities
- Gives more annuities more time to mature and grow in value
- Reduces buying risk associated with the purchase of just one annuity
Spreading out tax obligations of qualified money. Once someone reaches age 70.5, required minimum distributions kick in. Uncle Sam will start taking his share of retirement savings for public tax revenue. People who neglect to start taking the minimum withdrawals, at that point, may pay a 50% excise tax.
If investors need the income, purchasing an annuity with pre-tax money (known as a qualified annuity) can help with mitigating this tax obligation. Yes, qualified annuities also have RMD obligations, but the issuing annuity company will calculate those in its income payments to you. That can not only stretch out potential taxable funds over time, but also bring more peace of mind, as the insurance company handles the payments on your behalf.
These are just a few potential ways to use annuities. But, overall, any potential annuity strategy should not only make sense for your situation, it should also work toward helping you achieve your specific goals. As you consider annuities for your portfolio, work with someone who will guide in your best interest. Ask how they can provide best-interest advice, and no matter what, be sure you understand everything before you commit to any annuity purchase.
Are you ready for personal guidance with your retirement future? Financial professionals at SafeMoney.com can help you prepare for a retirement that’s confident and meaningful to you.
To start with a no-obligation retirement consultation, use our “Find a Financial Professional” section. You can connect with someone directly there. And if you need a personal referral, call us at 877.476.9723.