If you have spent some time exploring your options for retirement planning, you might have heard of a qualified longevity annuity contract, or QLAC for short. But what is a QLAC? What are some reasons that folks might consider this option for their situations?
As everyone knows, people tend to have many financial concerns nowadays. Having enough retirement income is a top concern among those who have stepped back from a full-time career. Among other things, low interest rates have made it harder to generate predictable income for even just run-of-the-mill living expenses in retirement.
With low rates hitting fixed-interest options such as CDs, Treasury securities, and bonds, the challenge is figuring out how to adequately supplement other sources of predictable income, such as Social Security or a pension. No wonder, then, that surveys have found that many retirees are afraid that they might run out of money in their later years.
Since they have a monopoly on paying reliable lifetime income, annuities are one vehicle that can help fill this gap. In fact, besides Social Security, annuities are the only thing on the planet capable of paying you a guaranteed income for life.
Challenges Still Linger
But even the income from an annuity may not be enough to cover a retiree’s expenses when they get into their final years, especially if they need services such as long-term care or home healthcare.
Conversely, many retirees won’t need to start taking money from their IRAs or workplace retirement plans when they turn 72 (the new age at which required minimum distributions must start). RMDs can create a tax headache for those with considerable retirement assets, and they may be an excess source of income in some cases.
Enter again a possible solution with QLACs, which can help with providing income in later years or providing some tax relief for a while regarding required minimum distributions.
Could annuities be a good investment for retirement? If you could have more peace of mind or your plan could be stronger from having contractual guarantees in it, such as guaranteed income for life, then it’s good to consider an annuity.
What about saving for retirement? If you are taking advantage of contributions to retirement accounts, then annuities can provide another tax-advantaged vehicle for you to build up even more retirement savings. These are just a few ways that an annuity might help you in your financial goals.
One Important Clarification
All of that being said, let’s go back to the original question: “Are annuities a good investment for retirees?” To delve fully into that, it’s important to be clear about what annuities are.
By definition, an annuity is a contract with an insurance company. In exchange for someone putting money into the annuity contract, the insurance carrier promises to uphold contractual guarantees over a certain time. This might be a contractual guarantee to pay you a lifetime income stream, for example.
Because of this use as a contract, many annuities aren’t technically an investment. Fixed-type annuities such as fixed annuities, multi-year guarantee annuities, and fixed index annuities are really fixed insurance contracts. In this regard, they are more of a risk-managing tool.
Whether you bring home a paycheck or earn your keep from entrepreneurship, everyone has some primary income sources during their career. But things change in retirement.
Some folks continue to work in some fashion, often for their own enjoyment. However, chances are you won’t count on this same income source in the way that you did during your career. You may well have to find a way to replace this income with other income streams.
Every generation faces different obstacles for retirement. But if you were to tune into any financial talk show today, you might hear the host say that retirement isn’t even close to how it was for your parents and grandparents. Why?
Nowadays, people have a variety of issues that are different in scope or that weren’t even around for prior generations. Never-before-seen economic conditions (such as those tied to the COVID-19 pandemic), lengthened lifespans, and evolving financial risks are all contributors to this.
What’s more, the definition of retirement has changed. Nowadays, retirees are taking their golden years by the horns. They are enjoying full lives of second career acts, budding entrepreneurship, volunteerism, and pursuit of lifestyles that might have not been possible for their parents or grandparents.
Here’s a look at why retirement is different for people today than it was in the past — and how you personally can be ready for the changes.
Are you a public employee and close to retirement age? If you prefer to not ‘separate from service’ quite yet, opting for a DROP retirement program can be worthwhile.
Depending on your employer, DROP is short for “deferred retirement option program” or “deferred retirement option plan.” DROP plans first came about in the 1980s for public-sector employees. Currently, members of law enforcement, firefighters, educators, and other civil employees often have this sort of program as an option for delayed retirement.
You have probably heard of some of the many states that offer a DROP program, including Florida, Ohio, Texas, and California. Of course, state governments aren’t the only ones with DROP programs. Municipal governments also offer DROP retirement options to their employees.
DROP benefits can be a great boon to employees who would otherwise prefer to keep working and not quite settle into retirement. If you do have this option as part of your retirement benefits, it’s a good idea to look more into it and see if it might make sense for your working goals.
Are you unsure about whether your retirement system has a DROP option? You can check with your HR department for more information.
All of that said, here is a quick rundown of what deferred retirement option plans involve and what sort of benefits you might obtain from it as a long-term civil employee.
The short answer? Immediate annuities actually don’t come with an accumulation period. Once you have paid premium into the contract – in most cases a one-time lump – the insurance carrier will start income payments nearly right away. Your income payouts may start anywhere from 1-12 months after the premium payment date.
When this starting date is depends on your contract and frequency of payments. You may receive income on a monthly, quarterly, or even annual basis. Many contract holders opt for a monthly payment schedule.
The insurance carrier puts the entire sum of your premium into a pool of other premiums it has been paid. Then it allocates these premiums into conservative, low-risk investments. In return, the carrier pledges to make payments to you – or someone you specify – for a specified period of time, which can be for the rest of your life. The income you receive includes a fixed sum and interest paid on a continual basis.
Therefore, immediate annuities don’t have an accumulation period – there is little time between when you pay premium and start receiving income. Many immediate annuity contracts start income payments just a month after the day you bought your annuity.
Where accumulation periods do apply is with deferred annuities. In these contracts, your money will be left alone for a number of years before you start taking income. Let’s get into more details below. Read More
Thinking about a fixed indexed annuity for your retirement? When considering a fixed index annuity, or any annuity contract for that matter, it’s helpful to think through all the pros and cons of your options before making a decision.
Nothing is perfect for every financial situation or contingency. Fixed index annuities are no exception in that regard. Rather, a strategic mix of financial vehicles and strategies will help create a balanced, personal retirement plan that fits your needs and situation.
A fixed index annuity can give your plan a strong foundation with its contractual guarantees. Your money can grow more in an indexed annuity than it might in other fixed-type annuities with guaranteed rates. However, this kind of annuity has some areas where it’s not as strong as other annuities or financial vehicles are.
People have a variety of accounts that they can use to save for retirement. You might have heard of some of them before. IRAs, 401(k)s, 403(b)s, and 457(b) accounts allow workers to put away money on a pre-tax basis and then take it out in retirement as taxable income.
What if you are worried about taxes? Then you can opt for a Roth account, in which you put away money on which you have already paid income taxes. The benefit is on the backend, where you can draw it out tax-free in retirement.
The good news is there are other ways that you can have even more tax-free income in retirement. These options can be a good supplement to a Roth account. So long as it’s properly structured and used correctly, an indexed universal life insurance policy can be one such vehicle. An IUL policy lets you build cash value by putting in premiums with after-tax money, then later take out money tax-free.
What’s more, policyholders also have a complete package of insurance benefits on top of their retirement income. Many IUL policies today provide living benefits for critical illness, chronic illness, and terminal illness. These benefits let you use proceeds to cover costly expenses in those health situations.
Despite your years of hard work, you might not know what to do with your 403b if you quit your employment. You have a few choices if you have been accumulating money in your 403b plan and are approaching or already in retirement. The question is, how does a 403b work when you retire?
Retirement is a significant life milestone. Knowing what to do with your retirement savings can significantly affect the kind of life you can lead after you leave the workforce. In this article, we’ll talk about everything you need to know about the 403b plan, including the answer to your question, “How does a 403b work when you retire?”
What Is a 403b Plan?
A 403b is a type of retirement savings plan that lets you accumulate money on a tax-advantaged basis. Similar to a 401(k) plan, employers provide it as a way for staff members to save money for retirement. On the other hand, government employers and some non-profit organizations usually provide 403b plans.
501(3) non-profits, hospitals, public schools, universities, and religious organizations are among the common employers offering 403b retirement savings plans. You can use this plan to set aside a portion of your paychecks for retirement. Although not all employers do, yours might match your contributions in some way.
A 403b allows you to make tax-deferred retirement contributions because it’s a tax-advantaged plan. In other words, every year you make contributions, your taxable income is decreased. There are annual contribution caps imposed by the IRS tax code.
Your money grows tax-free inside a 403b account because it is tax-deferred. When you withdraw money from your 403b account, taxes are deducted at the back end. People are encouraged to save for their retirement years by the way the plan is set up.
Some 403b plans also offer Roth account options if you are concerned about future taxes. Your contributions to your Roth 403b account will be taxable if you choose that course of action. On the other hand, both the account’s growth and your withdrawals will be tax-free in the back end.
Important Milestones That Can Affect You
You may be aware that, as you have a 403b plan, there is usually a 10% penalty for taking any withdrawals before the age of 59.5. The penalty and any unpaid income taxes apply to these withdrawals.
You can make withdrawals without incurring penalties once you reach 59.5. However, there is an exception to this rule that pertains to individuals who have not yet reached retirement age. The Rule of 55 permits individuals who are 55 years of age or older to take out cash from their 403b account without incurring a tax penalty, provided that specific requirements are fulfilled.
You may withdraw money from your 403b account without incurring penalties if you are between the ages of 55 and 59.5 and you are laid off, fired, or quit your employment. Those who quit their jobs before, during, or after the year they turn 55 are subject to the Rule of 55.
However, only funds that are currently included in your 403b plan are covered by this rule. When you were working at the job you left at the age of 55 or older, you invested in this plan. Old retirement plans from prior employment are not covered by the rule. Rather, those savings would be subject to the Rule of 59.5.
Remember that income taxes are also payable on withdrawals. Taxes cannot be avoided by holding money in a 403b account indefinitely. After you turn 70 years old, the required minimum distributions will take effect.
How Does a 403b Work When You Retire?
So, how does a 403b work when you retire? As you near these age milestones above or just retirement in general, you may have a variety of options for the assets inside your 403b plan.
Keep Your Money Where It Is
The first option is to simply keep your savings in your 403b retirement plan. When it comes to fees and selections alone, mutual funds and other investment options offered by these plans can differ significantly.
You may decide to simply leave your money alone if you are satisfied with its performance. If you choose this course, though, you will have to take the required minimum distributions in the future to meet withdrawal requirements.
Move Your Money Over Into Another Account
If you want to explore alternatives outside the 403b plan, you can roll it into another account, like the traditional IRA. A financial professional can help you with this.
Ask your financial professional about how you can transfer this money over without tax hits. Make sure to evaluate this option in terms of potential negatives and determine if the positives outweigh them before deciding to move forward.
If taxes are a concern for you, you also have the option to convert any assets in your 403b plan to a Roth account. You could pay the tax man up front by transferring your funds into a Roth IRA. As a result, you may be able to lower future taxes on your retirement income.
Take a Total Distribution From Your Plan
Most financial experts believe that this is the worst thing you can do with your retirement savings. The majority of them would agree that doing this ought to be reserved for extreme circumstances. For instance, you might be in a dire financial situation, need a sizable sum of money right away, and be without other options.
You might end up with a bigger tax bill than you would have otherwise. This kind of distribution typically puts you in a (much) higher tax bracket.
Make Periodic Withdrawals From Your 403b Account
Of course, you can also decide to leave your money in the 403b account and make sporadic withdrawals from it. This may be done because you require the money or to augment any other sources of income you are receiving.
Withdrawing money from a 403b account can occasionally take some time because access to the funds typically requires permission from the third-party administrator of your 403b plan.
Many 403b plans also require mandatory 20% tax withholdings on cash withdrawals, regardless of your tax bracket. In general, you might have fewer options. The point? Every possible financial decision has advantages and disadvantages.
As previously stated, if you intend to take an early retirement, you can withdraw money from your 403b without incurring penalties at age 55. You can arrange your withdrawals to make up the difference between your living expenses and your guaranteed sources of income.
How Much Income Will You Need for Retirement?
Now you know how a 403b works when you retire, how much income do you need to cover your living expenses during retirement? Seeking advice from a financial expert is the smartest idea. They can assist you in determining the annual income you can draw from your retirement savings without running out of money too soon.
Annuities are a good option to include in your retirement plan if you are concerned about running out of money too soon. Even if you spend all of the money in the annuity contract, you will still receive an income stream that is assured to last the duration of your life.
They’re made to keep you from earning more than you can afford. Annuities are the only financial product that can do this for you outside of Social Security.
Planning for Your Future Retirement
So, how does a 403b work when you retire? If you are still working, you have a 403b plan, and you are at or near retirement, you have options outlined above on how you want to use your 403b plan.
A financial professional can help you with the decision-making process. They can assist you in developing a plan using the resources you already have to accomplish your goals with the least amount of risk, depending on your circumstances, risk tolerance, and goals.
Are you looking for a financial professional to help guide you with your 403b plan? Get assistance from numerous independent financial professionals at SafeMoney.com. If you would like a personal recommendation, give us a call at 8774769723.
When it comes to annuities, have you ever heard of “period certain” payouts or other confusing terms? Many people use annuities for guaranteed income streams. It’s helpful to know what these terms might mean if you are thinking about an annuity for your retirement.
One of the great things about annuity contracts is how they can be structured to fit different situations. Do you want guaranteed monthly income for the rest of your life? The insurance company will pay you like clockwork, even if all of the money in your contract runs out and it’s still paying you decades later.
Or what if you want the guaranteed income to last for only a certain period? Then you have some flexibility in how long you choose to receive those payments. With help from your financial professional, you can explore different annuity payout options and see what makes sense for your needs.
Of course, some people worry about not being able to enjoy these guaranteed annuity payouts for as long as they might wish. What if something major happened and they passed away sooner in retirement than expected? They wouldn’t have a full return of the money that they had paid into the contract.
The good news is someone can choose payout options that continue payments to their loved ones should they pass away in this manner.
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