Buying an annuity with your retirement savings is one way to provide income for the long term. However, as with every investment, there are risks. Additionally, your personal goals and your current health may mean that an annuity isn't your best choice.
When Is an Annuity the Best Choice?
What is an Annuity?
An annuity is a retirement vehicle that you buy from an insurance company. You either buy it over time or pay for it in one lump sum, and it pays you for the remainder of your life. Depending on how long you live and the terms of the annuity, they might be appropriate investments.
Annuities come in many forms. A standard annuity starts paying out when you reach retirement age. If you withdraw funds from your annuity before age 59 1/2, you will need to pay a 10% penalty on the withdrawal. Additionally, your annuity benefits are taxed as regular income. You can also purchase a deferred income annuity that will pay out a set number of years after the purchase. This type of an annuity can provide you with a secure income in the future.
There is a sizable penalty if you need to surrender your annuity for a lump sum payment. However, in the event of a catastrophic health issue, long-term care admittance, or other significant life event, this penalty may be waived depending on the terms of your contract.
Variable or Fixed
If you decide to purchase an annuity, you should carefully consider your tolerance for risk. You need to determine if you want a variable or fixed vehicle. If you buy a fixed annuity, you'll get a specific payout over the entire term of the annuity. Variable annuities pay out based on what the investment market is doing at the time of the payout. As noted above, annuity income is taxed as regular income, so a variable annuity may take additional tax planning depending on market conditions.
If you're interested in an annuity structure, try to buy early. Your annuity investment can grow tax-deferred. No matter how much money the fund makes, you won't pay any income taxes on the money until you start withdrawing it. As many people are prepared for a decreased income during their retirement years, this tax burden can be significantly reduced. Your income and expenses will determine the best payout plan.
Your 401(k) and IRA can only be funded up to a certain amount every year pursuant to IRS guidelines. There's no cap to how much money you can put into your annuity. In addition, if you purchase an annuity early in your working life and are counting on that income, be aware that you can also purchase an annuity with a lump sum buyout from another retirement account to boost your retirement income.
When setting up your annuity, pay attention to the terms. There are penalties for cashing out or surrendering an annuity, though they may be waived should you suffer a catastrophic event. If you pre-decease the terms of your annuity, the remaining payments will be paid to your named beneficiaries. Make sure to set this up when determining the terms of the annuity to avoid these funds being caught in limbo. Your heirs may need these funds to settle other aspects of your estate.
Watch the Fees
An annuity provides guaranteed income, which can greatly reduce your anxiety about your retirement funds. However, some annuities can come with unitive fees, such as high commissions to the insurance broker or high fees for investment transfers. Carefully review your annuity contract to determine exactly what you'll need to pay if funds are transferred.
Annuities are purchased investment vehicles. They're not savings accounts, so they're not covered by the FDIC and any guarantees are subject to the claims paying ability of the issuer. Authorities with Annuity.org recommend that you purchase your annuity from an established insurance company with a solid history.
If you have a well thought out retirement budget and you have a good idea of what your expenses will be, an annuity may be a suitable investment option. There are regulations covering how much you can take out and when you need to start. To save confusion and face your retirement with confidence, contact a CFS* investment specialist at Truliant Federal Credit Union to determine the best investment vehicle for your future.
*Non-deposit investment products and services are offered through CUSO Financial Services, L.P. (“CFS”), a registered broker-dealer (Member FINRA / SIPC) and SEC Registered Investment Advisor. Products offered through CFS: are not NCUA/NCUSIF or otherwise federally insured, are not guarantees or obligations of the credit union, and may involve investment risk including possible loss of principal. Investment Representatives are registered through CFS. The Credit Union has contracted with CFS to make non-deposit investment products and services available to credit union members.
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Annuities are long-term financial products designed for retirement purposes. In essence, annuities are contractual agreements in which payment(s) are made to an insurance company, which agrees to pay out an income or a lump sum amount at a later date. There are contract limitations and fees and charges associated with annuities, administrative fees, and charges for optional benefits. A financial professional can provide cost information for complete details.