Annuities-Retirement Speed Bump Flexibility

For most people on the edge of retirement, they’re already pretty cognizant of life’s potential speed bumps, but what some may not realize is their dreams are larger than their savings. The biggest uninsured risk that most people face is that something good will happen, and you live a long life: We buy insurance for our cars. We need to buy insurance for ourselves.

If you have an active lifestyle and you want to make sure you have enough income to cover living expenses and have enough to enjoy your retirement. If you are concerned you will live many years beyond their life expectancy, and run out of money, an annuity is compelling.

Annuities protect against that outcome. They promise regular payments as long as you (and your spouse) live, so that you won’t outlast your retirement savings.  Once people get an education then buying annuities is really a no-brainer.

Retirement income has three pillars: Social Security, Pensions and private pensions and savings. The demise of defined benefit pensions, where retirees are guaranteed an income stream for life, even if the sum of those payments exceeds the accumulated contributions of the employee. It is determined based on the employee’s income, years of service and age, rather than market returns.

In the private sector, these plans are now a rarity. Many private-sector workers have defined contribution plans (401k) where both the employee and employer contribute to a retirement account. At retirement, the accumulated sum from those contributions will determine the amount of pension payments. Market fluctuations — like the 2008 crash — can dramatically affect the value of these pensions.

The establishment of an annuity is an excellent way to provide for the future financial security of a recipient. A deferred fixed annuity bears a very close resemblance to a traditional pension. During the accumulation stage, the annuity holder makes regular payments to the issuer of the annuity, an insurance company. Those payments are invested and the gains grow tax-deferred. Just as with a pension, the accumulation phase eventually ends and the proceeds are distributed to the recipient.

Once distribution payments begin, the general principle underlying an annuity mirrors that of the pension – to provide a level, lifelong income stream to the recipient.

A fixed annuity is a type of investment that many individuals choose when planning for retirement.  Once you purchase this type of product, the insurance company guarantees to provide you with a regular monthly payment during your retirement years. One option of an immediate annuity is to take a payout sufficient to cover ordinary expenses. The plan offers greater safety of principal and more flexibility.

One such difference points up a key use of annuities in retirement planning. The IRS imposes a 10% penalty on withdrawal of annuity income prior to age 59 ½. This allows an annuity holder to retire and take annuity income beginning at age 59 ½ and defer receipt of Social Security until age 65, rather than holding up retirement until age 65 or retiring at 62 but settling for a lower Social Security payout.

Perhaps the appeal of an lifetime annuity lies in how simple it is.  Annuities are offered in general by insurance companies and millions have benefited since its inception. Annuities are considered to be a passive form of investment. You do not have to make individual investment decisions once you get involved with an annuity contract. You simply pay your premiums and then the insurance company takes care of the rest.

There are several types of annuity products available, all can provide an individual or a family with enough savings for retirement.

One of the biggest differences between the annuities is the way that the interest rates are determined. With a fixed annuity, you get a fixed interest rate throughout the life of the annuity. With an indexed annuity, the rate that you get will depend on the performance of a financial index such as the S&P 500. This allows you to get some exposure to the stock market with the funds in your annuity.

An indexed annuity typically carries with it a minimum guaranteed interest rate and a maximum rate that can be earned. If the index performs poorly, the insurance company will still provide you with some kind of return. If it does well, you may not be able to earn the same rate as the index. Fixed annuities also have a guaranteed interest rate.

While it’s impossible to plan for three decades and include every contingency.  Human beings may be the only creatures on the planet blessed with imagination. But it certainly can be a mixed blessing, especially when it comes to envisioning retirement.

The words “pension” and “annuity” are both sometimes used to describe the same financial arrangement – a stream of money paid regularly, lasting for the lifetime of the recipient.  In economic terms, a private pension plan utilizes saving to redistribute consumption from earning years to retirement or non-earning years.