Let’s be real. It can be hard to save for retirement. But, after you figure out how much you need to save for retirement, the real work begins.
Obviously, there are a lot of ways to save for retirement. Your main options are 401(k)s through your employer and individual retirement accounts (IRAs). But, there are also annuities.
With an annuity, you can grow your retirement savings portfolio in a unique way. Essentially, an annuity is a hybrid between a retirement account and an insurance policy that offers several ways to grow your money. Due to their advantages, annuities are becoming increasingly popular to supplement retirement income.
When you have the funds and have maxed out your retirement contributions, getting a good annuity can be one of the best decisions you make. Why? Well, let’s dive in.
Helps you meet your retirement goals.
“Employer-sponsored plans such as a 401(k), 403(b) or Keogh are an important part of planning for retirement,” states the Insurance Information Institute. Also, IRAs and these plans have contribution limits. And. the income you need to retire may not be enough to cover your expenses. This is especially true for people who began saving for retirement late or whose contributions were interrupted by job changes or family responsibilities.
“Moreover, your social security and defined-benefit pension (if you have one) may provide less than you need to retire,” the III adds. “Remember that the purchasing power of defined-benefit pension income is eroded by inflation.”
Income from annuities can be guaranteed and predictable.
People are living longer these days. For example, when two people are age 65, there is a 50% chance of one of them living to age 92. The chances for one spouse to live to age 97 are 25%.
In other words, your retirement could last up to 30 years — if not longer. And, as a result, your money will need to last longer.
What’s more, it may not be enough to follow traditional retirement strategies. In spite of saving diligently for retirement, you might want to consider another type of income source, such as an annuity — even though you’re eligible for Social Security. Most annuities offer a guarantee of retirement income for the life of the annuitant.
With a fixed annuity, there is no fluctuation in the contract amounts. And, if you choose a lifetime payment, you’ll get a set amount for life.
Provides premium protection.
What exactly is premium protection? Simply put, it means you’ll always get your purchase payment back. In other words, you will never lose the money you invested.
Whatever kind of fixed annuity you choose, the initial investment is safe. The advantages of fixed-indexed annuities include premium protection during market downturns, as well as the potential for investment growth during market upturns. This means you can make money (within certain limits) without any risk of losing it.
Investing in stocks or equities, for example, puts your money at risk. In particular, retirees are often unable to afford this. The reason? For the rest of their lives, they will depend on their savings.
Annuities can grow your money faster.
You want to let your money grow before retiring. With an annuity, you get tax-deferred growth. Plus, interest isn’t taxed until you take it out.
Further, you can compound all of your interest or investment earnings this way. It is important to understand that annuities bought in IRAs or other tax-deferred accounts do not offer you any extra tax advantages. Earnings and income already go into the account tax-deferred.
In these cases, you should consider an annuity only for its features and benefits other than tax deferral.
It’s up to you when you receive income.
You can choose when to start receiving annuity payments. In most cases, you don’t even have to decide in advance. In short, you can decide what will benefit you the most. Whether you need income today or in the future.
Often, you have this ability by selecting either an immediate or deferred annuity.
- Immediate annuity. This type of annuity starts paying after one to 13 months of an initial premium.
- Deferred annuity. This is an annuity that pays out in the future, like 20 years from now. You can pay with a single premium, multiple premiums, or regular contributions.
You can contribute however much you want.
IRS-mandated contribution limits do not apply to non-qualified, tax-deferred annuities. IRAs and 401(k)s, however, are examples of tax-deferred retirement plans with limits. As such. if you’ve maxed out 401(k) or IRA contributions and want to save more in a tax-deferred vehicle, an annuity could be a good choice.
Another potential advantage with annuities? You can allow your annuity to continue growing for as long as you wish.
An annuity isn’t subject to required minimum distributions for tax-deferred retirement accounts like an IRA or 401(k) when you turn 72. The exception is that unless the annuity is part of another tax-deferred retirement account subject to RMDs.
Your portfolio can be more stable with annuities.
Bonds are a major source of retirement income for most retirees. That doesn’t mean something can’t be improved just because it’s always been done that way.
Right now, you can thank annuities. A good annuity can add portfolio stability, regardless of how long you need it. And it can provide a reliable income stream when you retire.
In most annuities, the income is fixed no matter what happens in the stock market. The same can’t be said about bonds, and even less about portfolio “drawdowns”.
Wade Pfau, a known expert in the retirement income arena, calls annuities “actuarial bonds.” This is because, even with bond funds, annuities may improve retirement outcomes.
“Lifetime risk can be framed simply as the possible shortfall in the amount you will need to spend, which can happen when market returns are bad or your life is unusually long,” Pfau states. “Reward, on the other hand, can be defined by any liquid financial assets that is available to support your additional spending for contingencies or to fund legacy objectives when you have otherwise been able to meet your lifestyle spending goals.”
Based on this, Pfau came to the conclusion that combining stocks and annuities produces better outcomes than combining stocks and bonds. An income annuity can actually replace the fixed income allocation in your retirement portfolio.
Keeps up with inflation.
As you know, with a guaranteed lifetime income plan, you can secure a reliable income stream for life. You might worry, though, whether your lifetime income will support your current lifestyle as costs rise as you retire.
Let’s say you have $3,000 in monthly costs right now. They’ll be around $4,000 in 10 years with just 3% inflation. Your monthly expenses will have more than doubled to about $6,200 after 25 years at that low inflation rate.
Thankfully, an annuity can help when it comes to rising costs.
Most immediate annuities have a cost-of-living provision that could increase payments by a set percentage (3%, say) or based on the Consumer Price Index change.
Tax-advantage retirement saving.
The only tax-deferred investment available without joining an IRA or retirement plan is an annuity.
You can also fund an annuity with an unlimited amount at once. The amount of money you can deposit into non-qualified annuities isn’t restricted.
Protection from bankruptcy and creditors.
Certain states don’t let creditors or bankruptcy courts seize annuities. In states like Florida and Texas, creditors cannot seize money held in an annuity or cash value life insurance policy.
In these two states, these statutes protect retirees who live in them and rely on annuities to live comfortably.
What about the rest of the country? In some cases, you’re exempt from seizure. However, some states don’t protect annuities from creditors.
A term may make an annuity ineligible in one state but eligible in another due to another state’s rules. An annuity can be eligible if there is a qualifying event that triggers eligibility or if the series of payments exceed a certain amount as set by state law.
Long-term care insurance.
In many annuity contracts, long-term care riders are available. As a result, you are protected from the costs of long-term care if you require it.
Nursing homes in the United States charge an average of $8,365 per month or $275 per day for private rooms. A semi-private room costs on average $7,441 per month and $245 per day. The average price of a semi-private room is $89,297, while the average price of a private room is $100,375.
In contrast to traditional long-term care insurance, long-term care annuity riders don’t cover the full costs of care. But the riders are often more affordable than regular policies. As of 2019, an average 60-year-old couple would have to spend $3,400 a year on long-term care insurance, according to the American Association for Long-Term Care Insurance.
You can also add riders to your annuity that will increase your payout for a set amount of time in case you need long-term care.
Provides an inheritance for beneficiaries.
You can pass on the value of your annuity directly to your beneficiaries with most annuities. It usually doesn’t go through probate either. Alternatively, you can specify that a beneficiary will receive a lump sum or a guaranteed income for a certain period.
The higher of these two values will generally be given to your designated beneficiaries:
- When you die, the account value or
- Contributions to the annuity (adjusted for any prior withdrawals).
An annuity can also have a guaranteed death benefit. If you die before you start receiving annuity income payments, your beneficiaries will get the full value of the account, including any interest earned.
Annuities are customizable.
There is no one-size-fits-all approach to annuities. And, that’s why you have a number of options with which to choose. There is a wide range of products available, from those that focus on growth potential to those that promise a steady, guaranteed income in the future.
To learn if you can get an annuity that fits your needs, we strongly recommend contacting a financial professional.
Frequently Asked Questions
1. How do I know if buying an annuity will be right for me?
Generally, you should only consider an annuity after you’ve exhausted other tax-advantaged retirement investments, like 401(k)s and IRAs.
Also, an annuity might make sense for you if you have extra money to save for retirement. This is especially true if you’re in a high-income bracket right now.
2. Which type of annuity is best?
If you don’t like taking risks and like predictability, fixed annuities might be a good option.
You might consider fixed index annuities if you’re comfortable with the potential upsides, but are wary of the potential downsides.
When you’re comfortable with risk and looking for the best growth potential, variable annuities make sense.
3. What is the best annuity for retirees?
With so much competition in the annuity market, you have plenty of options when choosing a provider or company. So to make it easier on you, we picked the five best annuities for retirees.
- Due. Thanks to Due, annuities are a lot easier to understand. With this fixed annuity, you can contribute however much you want. And. your money will earn a fixed interest rate of 3%.
- Fidelity. Considered an annuity leader, Fidelity offers six types of annuities. You can pick from retirement income, asset protection, or income plans. Fees are usually low, and A+ AM Best rates them high.
- Mass Mutual. The company has been offering annuities since 1857. We like RetireEase the best out of all the insurance Mass Mutual has. This is a premium deferred annuity. Payments are monthly, quarterly, semiannually, or annually, and there’s no annual fee.
- New York Life. Here’s another experienced leader with a solid rating from AM Best. As well as variable and fixed annuities, New York Life offers income annuities. New York Life’s biggest draw is that you can buy an annuity for $5,000.
- AgeUp. Unlike other annuity companies, AgeUp caters to seniors. If you’re approaching your 90s and worry about outliving your retirement savings, this is the perfect vehicle for you.
4. What are the cons of annuities?
Every financial product has its disadvantages, and annuities are no different. Some annuities charge rather excessive fees, for instance. And, annuity contracts can be complex.
Additionally, the safety of an annuity is attractive. But the returns can be less than traditional investments. In addition, once you contribute the money to fund an immediate annuity, you can’t get the money back or pass it on to a beneficiary.
5. How much does an annuity cost?
Annuity prices vary based on the type you choose. Annuities, no matter what kind you get, aren’t cheap. Mainly this is due to commission fees. These fees can be anywhere from 1% to 10% of the contract value. Additionally, there may be administrators’ fees and a mortality expense risk charge. And, there’s a surrender charge and tax penalty if you make a withdrawal before the age of 59 ½.
Even so, payout annuities and fixed indexed annuities don’t charge any fees. A fixed-rate annuity typically costs less than a variable-rate annuity.