Figuring out how much money you need to comfortably retire can be a difficult task. The retirement account provided by your employer may not be enough to cover your future needs, leaving a deficiency that can be covered by an annuity.
An annuity is an investment product sold by insurance companies, useful for building financial security in the retirement years. Purchasing an annuity will give you the freedom to make payments into a specialized account with unique tax benefits and flexible payout options.
Understanding the various retirement plans available to you can help you decide the best way to manage your family’s wealth now and in the future.
The amount of money you receive during retirement will be based on the type of annuity, the amount of money you contribute, and when and how you will receive payments.
The main types of annuities are deferred, where money accumulates over time (for those with retirement further down the road), or immediate, where you can receive payments right away (often used by those near retirement age).
Within these two categories are both fixed and variable options. You may choose a fixed annuity, which promises a guaranteed payment minimum or a variable annuity, with payments contingent upon the success of subaccounts invested in the bond, stock and money market.
The money put into an annuity grows tax-deferred, making the most out of every dollar you contribute.
Unlike 401(k)s and traditional IRAs, an annuity does not have an annual contribution limit. This bonus is especially beneficial to those nearing retirement, as there is not time to slowly set aside a small portion of income, making larger contributions necessary to ensure a stable retirement income.
Insurance companies offer certain guarantees on annuities, depending on the annuity you choose. There are two primary guarantees that accompany annuities. First, you are guaranteed a specified rate of return on each dollar you put in. Second, you are guaranteed a specific length of time you will be receiving payments.
Many annuities include a death benefit, which means that an assigned beneficiary will receive money, which may be in the form of payments or a lump sum, if the annuitant passes away.
Make sure to research the company you are planning on purchasing your annuity from, as your long-term financial stability could depend on their credibility.
Paying for Flexibility
Part of choosing an annuity requires deciding how and when you want to receive payments. You may opt for a series of monthly payments or a lump sum. Additionally, paying certain fees will allow you to receive payouts even before retirement.
While the money you put into an annuity may be intended for down the road, you may find that you need access to your cash sooner than you expected. Whether you are purchasing a house or launching a business, sometimes your financial plan takes an unexpected turn. Fortunately, you have the option to sell your annuity and gain immediate access to the future funds.
You may sell your entire annuity or a portion of the payments you expect to receive. There is a legal process, and various fees are involved, depending on the stipulations of your annuity agreement. While you will lose some of your original investment, you are paying for flexibility.
Alanna Ritchie is a content writer for Debt.org, where she writes about personal finance and little smart ways to spend (and save) money. Alanna has an English degree from Rollins College.