Annuities As A Personal Pension
Annuities offer an alternative for those who have already
contributed the maximum to their other retirement savings.
What do you do when you’ve already made the maximum yearly contribution to your 401k and/or an IRA?
What if you’re looking for an alternative all together? If either of those situations describes you, then an
annuity might be a retirement savings option worth considering. Annuities are sometimes called
“personal pensions,” because they pay you a guaranteed income during retirement. But how do they
work? And are they right for you?
You put money into an annuity in return for a steady stream of income after you’ve retired. Keep in mind
annuities are primarily retirement savings vehicles and generally require a minimum number of years you
must keep your money in the annuity without facing a penalty when withdrawing from it. Early withdrawals
also are subject to surrender charges and a 10 percent penalty if withdrawn before age 59½. However,
most annuities have some sort of provision that allows you to withdraw 10% of your funds in an
One of the biggest advantages of annuities lies in taxes. Earnings in an annuity
generally offer tax-deferred growth. This is especially helpful if you expect to be
in a much lower tax-bracket during retirement.
When you wish to begin collecting payments from your annuity, you simply
contact the annuity company, which calculates your monthly payment. The
amount of the payment is based on your projected lifespan, the amount in your
account and your current age. Payments also may depend upon any other types
of provisions that you’ve opted to include. One provision may stipulate that your
payments will continue to a living spouse after your death. You also may choose
to include a provision that guarantees payment for a number of years, paying
your estate if you die before those years are up. Remember that the more
provisions you put into your annuity regarding payments, the less your monthly
payments are likely to be due to the additional expense of thse optional riders.
While annuities come in many shapes and sizes, there are two basic categories:
immediate and deferred. Immediate annuities are usually associated with a lump
sum of money that comes into your possession – like winning the lottery. While
you shouldn’t plan on your lucky numbers being drawn any time soon, there are
other situations in which an immediate annuity may be best, including receiving
an inheritance. You also may choose this option when you reach retirement and
decide to put all or most of your previous savings as one lump sum into an
The alternative choice, which is more widely used, is called a deferred annuity
and is used to grow your assets and provide a steady income stream during
retirement. During the savings and investing phase, your contributions grow
tax-deferred. During the retirement income phase, you choose how you’d like
to receive withdrawals: systematic, as you need funds or steady income
payments (called annuitizing your contract). You choose to receive these
payments for a set period of time or guaranteed for life.
Deferred annuities can be variable or fixed. With a variable deferred annuity, you usually have the
opportunity to receive a minimum monthly payment while also receiving extra money gained from
investments. Depending on market performance, your extra amount each month may fluctuate,
sometimes greatly. Investment return and principal value of an investment in a variable annuity will
fluctuate, and your shares, when redeemed, may be worth more or less than their original cost. But if
you’re looking to make extra money from your investments, even during retirement, while still being
guaranteed a monthly payment, a variable annuity might be for you.
If you choose a more conservative approach, a fixed annuity offers the safety of a guaranteed monthly
payment, but you miss out on any growth your investment could possibly achieve if it were invested. It is
largely considered a “low-risk” investment opportunity. It’s also a “low-growth” investment. The safety and
any guarantees of an annuity are dependent on the financial strength and claims paying ability of the
issuing insurance company, instead of the markets.
Many Americans turn to annuities when they’ve maxed out their yearly contribution to employer-
sponsored plans and their own IRAs. Many others use annuities as their sole retirement investment,
especially if they wish to include a death benefit for a spouse. Annuities might not be for everyone, so
consult a financial professional, but they are one more option available to help you plan for retirement.
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