By Tillie Vuksich
When people think of retirement, depending on their age they often say things like: “I don’t think I’ll ever be able to retire” or “I’m too young to even think about that now.” It’s true that many people feel like it isn’t worth their time to plan for retiring, but I think it’s always a promising idea to start planning and learning how to maximize all the ways to save for your future.
Annuities are a way to create a stream of income in retirement from your savings that you cannot outlive. The way an annuity works, it is a contract with an insurance company that you invest your money in one of their products to then receive monthly payments for lifetime or a set period. You fund it with either a lump sum or with monthly payments, this is called the “accumulation” phase. Once you decide to switch to receiving payments, this is called the “annuitization” phase. The lump sum annuity is called an immediate annuity, and you begin receiving the payments in about a month. The deferred annuity is when you make the monthly payments for the accumulation phase and pick a date that you choose annuitization phase, a least a year or more later.
Many people choose to put some of their money into an annuity during their working years to help save for retirement because unlike the 401k and IRA there are no limits on how much they can invest.
Also, people can start an immediate annuity with a lump sum at later ages which is helpful when trying to make sure they have enough steady income in retirement.
There are three main types of annuities; indexed, variable, and fixed. Indexed annuities are tied to stock market indices such as the S&P 500 and track the entire market, this will give you a part of market gains but also protect your investment from any market loss. Variable annuities, however, are linked to mutual funds, stocks and bonds which can give you the greatest gains and losses depending on the way those funds perform.
Fixed annuities are not tied to the market or stocks and offer a flat rate of return. Your risk tolerance and timeline when money will be needed are the biggest factors for choosing the right annuity for you. Consult with a trusted retirement specialist to see how you can use these products for retirement income.
Here are some cons to an annuity: it offers low liquidity and will have a “surrender” charge if you decide to end the contract before the annuitization or pay out phase, the fees can be high for this product (especially for a variable annuity) and there’s potential income tax to be paid on payments.
Everything comes with pros and cons, but once you figure out your end goal it makes it easy to settle on a plan that can give you more potential gains than losses.
Next week I want to share the financial benefits of charitable giving.
Tillie Vuksich, TN Agent No. 3003287290
Contact her at: Tvuksich@appreciationfinancial.com or call 253-906-2930
