When you’re thinking about your retirement plan, you may want to consider adding one or more annuities to your portfolio. Annuities are tax-deferred insurance contracts; you invest either a single lump sum or a series of small amounts with a life insurance company. In exchange, you will earn interest on that money during the accumulation phase and will receive payments to either you or your beneficiary during the distribution phase.
The answer to the question, “Do I need an annuity?” is dependent on your unique retirement plan, but in most instances annuities can help round-out your retirement plan and offer benefits that other savings vehicles do not.
5 Advantages that Make Annuities a Good Investment
Preparing for retirement today may look different than it did five years ago, and when change is projected it can be comforting to have a strong foundation that annuities can help provide.
Steady Stream of Retirement Income
Annuities are growing in popularity in part because they provide a consistent stream of income, which helps address many retirees’ fears of outliving their savings.
There are a variety of ways annuities pay out. The most common is over a specified length of time (typically 5-20 years), but there are also annuities that pay out for the purchaser’s entire life with no survivor benefits or annuities that pay out for the life of the purchaser + another (such as a spouse). In any payout scenario, annuities offer guaranteed income. This can serve as a foundation to riskier investments aimed at helping to offset one of the most worrisome threats to retirement – inflation.
Unlimited Contributions to Boost Savings
Unlike some retirement savings vehicles, there is no annual contribution limits when investing in annuities. That means you can be putting money into multiple annuities set to payout at different times or in different ways to help maintain your standard of living and address unexpected expenses that pop up during retirement.
Choose When to Receive Payments
You can make a distribution plan that minimizes your income tax liability while still giving you the funds you’re looking for. If you withdraw early, a penalty free partial withdraw feature can allow you to take out a portion of your annuity penalty free, but keep in mind that a full surrender will likely have a penalty. Required Minimum Distributions do apply to annuities, but you can set up your annuity to pay out on your timeline within IRS tax guidelines.
Take Advantage of Tax-deferred Growth
Taxes are always complicated, and taxation of annuities is no different. In general, though, earnings from annuities purchased with after-tax dollars are tax-deferred until the earnings are paid out. That means that more money is available to be invested during the accumulation phase, increasing your opportunities for return.
Guaranteed Rates of Return with Fixed Annuities
There are three types of annuities: variable, indexed and fixed. Variable annuities can offer various range of investment options. The value of your contract will depend on how the investment options you choose perform. During the payout phase, a variable annuity contract may permit you to choose between receiving payments that are fixed in amount or that vary based on the performance of the investment options.
An indexed annuity will credit an interest rate based on the performance of a particular market index. This type of annuity will allow for upside market potential without fear of losing principal. Indexed fixed annuities can provide steady retirement income payments that can help with risks like inflation.
Fixed annuities can offer a guaranteed rate of return when compared to other retirement savings options and can offer protection against market volatility. With a fixed annuity, you can receive stable and regular payments.
Who Should Buy Annuities?
Annuities may be particularly helpful for people who are saving for retirement later in life, are close to retirement, have maxed out other retirement savings vehicles or have a lower tolerance for risk. However, they can be an important part of any retirement plan. If you’re wondering if an annuity is right for you, connect with a Farm Bureau agent or financial advisor to discuss how it might benefit your retirement savings plan.