Annuities and Your GoalsWhether your goal is saving for retirement or you have already reached that goal and you want to be sure that you will never outlive your savings, an annuity may be just what you're looking for.
Why consider an annuity? Annuities can be a key component of your overall retirement savings plan. Annuities enable you to save money on a tax-deferred basis, so all of your money can work for you now. No taxes are due until you begin to withdraw your money, which can be years later. With annuities, there is more left which may grow for you.
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When you're ready to receive income, generally in retirement, annuities can provide you with a variety of income choices, including a guaranteed income that you can never outlive. In addition, if you die before income payments begin, many variable annuities provide a death benefit that guarantees your beneficiaries will never receive less than the amount contributed to the contract, less any withdrawals or fees.
There are two primary types of annuities. One is a deferred annuity, a type of long-term personal retirement account, which allows you to save and invest on a tax-deferred basis with an option to receive a stream of income at a later date. The other is an immediate annuity, which provides regular income payments right away or within a short time afterward.
Keep in mind that deferred annuities are long-term vehicles. Withdrawals of earnings from a deferred annuity are subject to ordinary income tax and may be subject to contract withdrawal charges. Because deferred annuities are designed specifically for retirement, withdrawals made before age 59½ are generally subject to a 10% tax penalty. Why Supplement Your Retirement Savings?
Today, many investors will need to rely on their own investments to fund a comfortable retirement and protect themselves from outliving their assets.
Consider the following: Retirement Plans Limit Your Contribution
Your employer-sponsored plan, such as a 401(k), 403(b) or Keogh, has limits on the amount of money you can contribute each year. If you are still working, you may benefit by contributing the maximum amount you can to these plans. Because your contribution is limited, however, the amount you receive at retirement is limited too. You may want to supplement this plan with a non-qualified tax-deferred annuity. Unlike employer-sponsored plans and IRAs, there is virtually no limit on the amount you can contribute to a non-qualified annuity.
Social Security and Pensions May Not Be Enough
Your Social Security and pension may provide less than half of a typical retiree's income needs. As you can see in the chart below, Social Security accounted for just 38% of the total income for retired people with incomes of $31,000 or more.
In October 2000, the average Social Security check for those age 65 or older was just $815 per month (source: Social Security Administration, 2000).
Social Security and Pensions provide only a fraction of what you may need (source: Social Security Administration, January 2003).
Life Expectancies are Increasing
We had heard about annuities and were investigating them for our IRAs. We also heard bad things about pushy brokers over the years. So when we went to the ImmediateAnnuities.com site we were skeptical about calling them. But whenever we called their staff was really friendly. They answered all our questions and one of their reps even told us that at our ages there was no advantage to buying the annuity with our IRAs. These guys are really honest!
People are living longer, which means your retirement assets may need to last 20 to 30 years, or more. Inflation Can Erode the Value of Money
To maintain your purchasing power, your assets need to grow equal to, or faster than, the rate of inflation. Even if inflation averages just 4% per year, your purchasing power may be cut in half in almost 20 years.(Source: Consumer Price Index)
Only annuities provide the retirement income options that can protect you from outliving your assets. Annuities can complement your other retirement plans by providing the benefits of tax-deferred growth, retirement income options and flexibility. Variable deferred annuities also offer investment choices and beneficiary protection in the form of a guaranteed death benefit to help you build extra retirement income.
Tax Deferral Grows Your Money Faster
An important benefit of annuities is tax-deferred growth. Tax deferral means that you do not pay taxes on your earnings until you withdraw your money, usually at retirement. At that time, only your earnings are taxed. Because your earnings are not reduced each year by taxes, they can compound faster. Over time, tax-deferred compounding of your investment returns can provide a greater growth potential than a similar investment that is taxed every year.
Tax deferral is an important benefit if you are purchasing an annuity. Unlike with a non-qualified annuity, the Internal Revenue Code provides tax deferral for all IRAs so there is no additional tax benefit obtained by funding an IRA with a variable annuity.