Let’s take a minute to talk about the future. You’re nearly 60 years old, you’ve been working for the past 40 years, become a parent, bought a house, and lived a life. Now you are ready to spend the next chapter of that life doing the things you love the most. You are ready to retire! That beautiful day will have an equally beautiful result if you spend some time now preparing to live after leaving the workforce. Learning about the value of annuities before you retire, will guarantee that your golden years won’t be spent worrying about having enough money to cover your expenses.
Paying It Forward…To You.
An annuity is a gift you start giving your future, retired-self while you are younger and still working. It’s like building a nest egg for all the things you want to do when your time is your own. You can purchase annuities through a licensed agent or through a financial institution.
An Annuity Is About Protection of Capital
When you retire, your options of where to pull money from will vary. Some of the obvious avenues available to you are your:
- Stocks and Bonds
- Social Security
- Pension or retirement packages
An annuity is another tool you can set up for yourself to receive an income stream in retirement. Here’s the basic process:
- You contribute a large sum of money (either in a lump payment or spread out over time) to an insurance company.
- They, in turn, agree to invest it and guarantee a rate of return.
- Together, you agree on a future year that the annuity begins paying you in regular monthly payments for the rest of your life or a set amount of years
In this way, you can plan for your future during your productive years and safely continue to enjoy the fruits of your labor down the home stretch.
There are several types of annuities and each one offers a different approach concerning how the cash in the annuity will grow. As not everyone has a pension from their job or a diverse portfolio of stocks, an annuity is an opportunity to ensure that you have everything you need when you stop working. There are tax benefits too!
Tax-deferred Income Pays for Your Annuity
Annuities can be purchased tax-deferred. This means that while you are socking away money each month into your annuity, that income will not be taxed that year This is a great way to allow your income to generate moderate growth in the annuity without being taxed as the growth in an annuity is also tax-deferred.
When you begin receiving income back from the annuity, it will be taxed at your normal tax rate. While a young person may see this as simply kicking the tax can down the road, it is important because it allows you to maximize growth during your contributing or accumulation phase. Not to mention, it’s always nice to find ways to lower your tax bill while you are in your working years.
Which Type of Annuity Should I Get?
There are 3 main types of annuities when it comes to how cash accumulates. Let’s briefly go over those here.
A fixed annuity sets a fixed return rate (similar to a bank savings account) that guarantees a consistent rate of return during the years that you are paying into the annuity. The average rate varies but hovers above and around 3%. An annuity with a 3% guaranteed fixed minimum return would grow $3,000 dollars for every $100,000 dollars of premium paid into the annuity, minus any fees. This is an excellent choice for people who simply want to protect the principal capital that they are counting on in their retirement years.
Fixed Index Annuity
A fixed indexed annuity mirrors a market index such as the S&P 500, Dow Jones Industrial, or other indices. A fixed index annuity can experience cash accumulation at near the rate of the market it mirrors. A cap is placed to limit the total gains, but a floor is also established to prevent losses should the market go down. While often described as the ‘best of both worlds’ when it comes to safely growing cash in an annuity, there are many factors and circumstances that play into whether or not a fixed index annuity is right for you.
A variable annuity is directly tied to a market. This means that fluctuations in the market can have a positive and negative impact on your annuity cash value. If the market goes up, your cash will grow at a more substantial rate than a fixed or fixed index annuity. However, if the market takes a dive, your investment will ride the roller coaster down along with it. You should always consult with an annuity professional to determine whether a variable annuity is a good fit for your retirement portfolio.
Annuities Are the Gift that Keeps On Giving
When all is said and done, annuities are an excellent choice for people who want to feel secure in their retirement. The straightforward nature of how they payout over the course of your non-earning years will come as a relief to people who just want to enjoy their retirement.
Having a solid retirement plan is essential to make the most out of your post-working life. They are supposed to be the best years. An annuity can help ensure that they are exactly that.