Providing A Stream of Income for Your Retirement Years
Are you fiscally ready for retirement? If you're like most people, you have hopes and dreams for your after-work years:
- Spending more time with the family...
- Building that dream house...
- Cruising to some sunny island...
Annuities are becoming an increasingly popular method for putting these dreams into action. Many people feel that government retirement benefits alone won't be enough to help them realize their dreams. They know that they'll also need additional income from personal savings and investments. In some cases, their employers are also reducing dollar amounts within corporate pension plans.
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When new sources of income are necessary, annuities can be the key to establishing a personal savings program that complements Social Security, savings and pension benefits.
Annuities: An Attractive Option
An annuity is a contract issued by an insurance company. During the accumulation period, you may set aside money during your working years and have it grow on a tax-deferred basis until you're ready to use it.
After the accumulation period, there are three payout options:
- Lump Sum: This may be the least efficient option for you to consider, whereby all assets are withdrawn, taxes are paid and you live off the remaining funds. In this option, you're not assured of a continuing income.
- Systematic Withdrawal: With this method, payments are preset and are paid at regular intervals until all assets are withdrawn. While this option allows you to spread out your tax liabilities, the disadvantage is that you may run out of money while you still have many years left in retirement.
- Annuitization: This payout method may provide the most benefits. With annuitization, you can choose an annuity with payout options that best suit your financial circumstances and needs. In an environment of continuing medical advancements and lengthening life spans, annuitization is an increasingly important option, as this choice can generate an income stream to last the rest of your life. Withdrawals or loans made prior to age 59-1/2, regardless of the payout option, are subject to a 10 percent IRS penalty and current taxation. The guarantees of a variable annuity are based on the claims paying ability of the issuing life insurance company. The guarantees and the claims paying ability do not have any bearing on the performance of the investment options within a variable annuity.
Annuities can be "fixed" or "variable." The primary benefit of fixed annuities is that the income at the time of payments is always the same. This option gives you the comfort of always knowing the amount of each check you will receive.
With a variable immediate annuity, the return is based on the performance of the underlying investment options chosen. As with any investment, the income stream can change based on the level of investment risk at which you are willing to accept: with higher risk comes higher potential return on investment; with lower risk investments, the lower the potential level of return. With the possibility of increased payments tied to the performance of your investment choices, the opportunity may also be there for your income to keep pace or outpace inflation.
While there are pros and cons to investing in either a fixed or variable annuity, one type may generally be a better fit for your particular life situation. Regardless of the choice you make, both can provide regular income payments that cannot be outlived. Both have similar tax planning benefits, as well. Beyond offering the powerful advantage of tax deferral, annuities can also bypass the probate process. Also, annuitization payments include a return of principal, which is not taxable when received.
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Annuity Payment Options
There are several customized payout options offered by insurance companies for both fixed and variable annuities. The most popular choices include the following:
- Life Annuity: This option provides regular payments to you during your lifetime with benefits ending when you die. This annuity generally offers the highest periodic payments but is not suitable if you wish to provide a continuing income to your survivor.
- Life Annuity with Period Certain: This option provides regular payments for your lifetime with a guarantee for a minimum number of years called the period certain. If you live beyond the period certain, payments will continue uninterrupted for your lifetime. If you die before the period certain is over, your beneficiary receives payments for the remainder of the period certain.
- Period Certain Annuity: With this option, regular payments continue for a specific length of time (the period certain) -- typically three to 20 years. At the end of the period certain, payments stop whether they're being received by you or your beneficiary.
- Joint and Last Survivor Annuity: This option provides regular payments to you and your spouse while you're both living. When one dies, the survivor will continue to receive payments until his or her death. Payments stop when both of you have died. This option is available in three forms:
- Joint and Full - The survivor receives the full monthly payment.
- Joint and 2/3 - The survivor receives 2/3 of the monthly payment.
- Joint and 1/2 - The survivor receives 1/2 of the monthly payment.
- Life Annuity with 50 percent to spouse: Finally, this option provides regular payments to you during your lifetime. It differs from the Joint and Last Survivor option, in that payments continue at 50 percent of your original monthly income for the remaining lifetime of your surviving spouse. If your spouse dies before you, the monthly payment is not reduced.
Some of the better companies are also beginning to offer "flexible" payment options that allow some access to additional cash values beyond your regular annuity payments.
The lifetime income stream that annuities offer can play an important role in helping to meet your future retirement needs. The costs associated with owning an annuity contract may involve mortality and expense charges, surrender charges, and investment expense charges.
Variable annuities are sold by prospectus which describes risk factors, fees, and surrender charges that may apply. You should consider the investment objectives, risks, charges, and expenses of the variable annuity carefully before investing. The product prospectus contains this and other information. You may obtain a copy of the prospectus from your representative. Please read the prospectus carefully before investing.