Throughout your whole career, you’ve been accustomed to regular income from your employer. Although you might’ve been saving up for retirement for a long time, what if there was a way to continue a steady, reliable stream of income?
Buying an annuity is the solution for guaranteed income throughout retirement. Plus, the value of an annuity can grow overtime and offer tax advantages.
Quick Links
- Is Buying an Annuity Right for Me?
- 6 Benefits to Expect when Buying an Annuity
- 4 Questions to Ask Yourself Before Buying an Annuity
- How to Get Started with Annuities
Is Buying an Annuity Right for Me?
If you’re thinking about financial security in retirement, then annuities are a great place to start. Annuities are a life insurance vehicle offering steady reliable income during retirement. Before receiving that income, though, you’ll have to think about saving.
To start an annuity contract, you’ll need to contribute money toward your policy in the form of a premium payment. Your life insurance provider will put this money where it will earn interest, giving the money time to grow before you receive payments during retirement. But, there are different kinds of annuity products, and every life insurance provider has their own set of rules.
One type of annuity is a deferred annuity. With deferred annuities, you’ll need to make premium payments before receiving the money back during retirement. These premiums can be paid in either a lump-sum amount or several installments overtime. In contrast, immediate annuities also provide income during retirement, but that money is paid back to the policyholder almost immediately (hence the name).
Beyond deferred and immediate annuities, there are also fixed and variable annuities. Fixed annuities provide a guaranteed amount of money to the annuity holder, while variable annuities put payments in a mutual fund that may fluctuate as interest rates change. There is a larger element of risk with variable annuities, but they have the opportunity to yield greater returns than fixed annuities.
To determine if an annuity is right for you, you’ll also need to consider what benefits they provide. Many people choose annuities as a low-risk option for financial security through retirement. But, there are more benefits than that.
6 Benefits to Expect when Buying an Annuity
In 2023, Americans purchased about $360 billion of annuities, according to LIMRA. That’s $47 billion more than what was purchased the year before, which had been the record high. With so many people flocking to purchase annuities, they must be on to something, right? Here’s a look at the benefits that come with buying an annuity.
1. Customization
Like other insurance products, you’ll have some flexibility and customization with annuities. By adding additional riders to your policy, you can have an annuity product tailored to your specific needs. For example, you might consider adding a long-term care rider to provide additional coverage for in-home care or services from an assisted living facility.
2. Financial Security
People often choose annuities for the guaranteed income throughout retirement. While you may be looking forward to some time to relax at the end of your career, you also need to keep yourself and your family financially stable. That’s where annuities come in. Even though you may not be working, you can still set yourself up for success with regular income payments through multi-year guaranteed annuities (MYGAs).
3. Tax Benefits
Annuities have some notable tax benefits, like tax-deferred growth. This means that as your annuity grows, it will remain untaxed until you begin receiving income payments. At that point, you’ll be required to pay taxes on that income. However, these payments are often lower during retirement so those taxes will still be lower in comparison to any income taxes paid before retirement.
4. No Contribution Limits
Before retirement, you can set up your deferred annuity with either a lump-sum or regular contributions. And, there’s no limit to how much you can contribute to your account, unlike other retirement savings plans like 401(k)s and IRAs.
5. Safe Investment Options
Similar to how banks offer accounts that are FDIC insured, annuities are protected by state guaranty associations. This ensures that if your issuing insurance company goes bankrupt, your money is still protected. In particular, fixed annuities are also considered a low-risk option for financial security.
6. Diversified Portfolios
If you’ve been considering ways to save up for retirement, then you’ve probably been told it’s a good idea to diversify your portfolio. A diversified portfolio can contribute to reduced risk for long-term savings plans and yield higher returns. But, it’s important to consider how much risk you are willing to take in order to build up your finances for retirement. We already covered how annuities are a safe option for investing, so if you’re looking to reduce your risk, annuities are a good option.
4 Questions to Ask Yourself Before Buying an Annuity
Annuities are a great option for income during retirement. But, to set yourself up for financial success you also need to begin planning how you are going to achieve that. When meeting with an insurance agent to discuss options for annuities, you should begin by evaluating what you are able to contribute and what you need from an annuity. Here are a few questions to help you get started.
When can I begin saving up?
Are you in a position to think about retirement in the long-term, or will you need income payments in the near future? Many financial advisors suggest starting income payments between 70 and 75 years old, though you’ll have to put some money away before then. To calculate the best time to buy an annuity, you’ll also need to factor in life expectancy.
Income payments from annuities are made up of the principal from the annuity and any interest earned. For example, consider a lump-sum payment to an immediate annuity of $250,000 at 70 years old with an interest rate of 3%. In this example, if the individual were to have a life expectancy of 20 years, then their monthly income would be $1,381.43. This result is possible with a large lump-sum payment. So, to guarantee income for yourself, you’ll need to evaluate how much money you can contribute in the beginning.
What are my retirement goals?
Speaking of premium payments, you should also consider your long-term goals for retirement. This includes estimating when you plan to retire. Even though the average age of retirement in the U.S. is 65 years old, recent studies point out that many people are retiring earlier than that.
Additionally, to set financial goals for retirement, you’ll need to think about what you would like to use that money for. Are you looking to travel? Are you considering buying a new home or moving into a living facility? Would you like to leave an inheritance or contribute to a meaningful organization? Taking time to ask yourself these questions can help you better pinpoint your retirement goals.
How do I want to receive payouts?
So far, we’ve discussed pre-retirement plans for financial success during retirement. But, it’s time to shift gears toward how you would like to receive payments from your annuity. You, your family, and your insurance provider can discuss annuity payouts and what options are available. Whichever option you choose should align with your retirement goals. Some options include:
- Lump-Sum Payouts: The entire value of the annuity is paid out in a single payment at one time.
- Life Only: The annuitant can receive regular payments from the value of the annuity for the remainder of their life.
- Life Annuity with Period Certain: The annuitant will receive regular payouts for a specified period of time.
- Systematic Withdrawal: The value of the annuity is distributed at regular intervals until the entire value is distributed.
What happens if I die before receiving payouts?
When ironing out the details of your annuity, you’ll need to identify a beneficiary. If the annuitant passes away before receiving the total value of their annuity, the remaining value will be directed to the beneficiary.
Once again, beneficiaries can tie back to your retirement goals. If you would like to leave an inheritance, then you might select to give any remaining money from your annuity to a relative. If you would like to make a contribution or a donation to an organization, then you may list that organization as your beneficiary.
How to Get Started with Annuities
Annuities are a great tool to provide you with financial security later in life. With a safety net of income, you can ensure that you are keeping yourself and your family comfortable for years to come. Now, it’s time to compile your retirement goals and sit down with your insurance agent to get the ball rolling.
ELCO Mutual’s range of annuity products, both non-qualified and individual retirement accounts (IRAs), will bring you a steady stream of income in a way that works for you and your lifestyle. To get started with flexible premium deferred annuities, single premium deferred annuities, or medicaid compliant annuities, get in touch with one of our independent insurance agents today!
