Guaranteed Income for Retirement
An annuity is a contract between you and an insurance company in which you make a lump sum payment or series of payments and, in return, receive regular disbursements, beginning either immediately or at some point in the future. Annuities can provide virtually guaranteed income for life, and for a price, you can even get inflation protection. For this reason, annuities can be appropriate for investors with extremely low risk tolerance. Typically you should consider an annuity only after you have maxed out other tax-advantaged retirement investment vehicles, such as 401(k) plans and IRAs. If you have additional money to set aside for retirement, an annuity’s tax-free growth may make sense, especially if you are in a high-income tax bracket today.
An immediate annuity is a contract under which you give a company a lump sum of cash and they agree to give you a fixed amount of money per month, starting immediately. Generally, immediate annuities are intended to create lifelong income streams, but there are some that only pay for a set period. Some of the advantages are things like long-term stability, tax-deferred income, and monthly income payments for the rest of your life. This type of annuity is most appropriate for people who are already retired and are looking for peace of mind regarding their retirement income.
Pre-retirees and other people who don’t need the money right away may want to consider a deferred annuity, which delays payment by a number of years but makes higher guaranteed monthly payments. It’s designed for long-term savings and, unlike an immediate annuity, which starts annual or monthly payments almost immediately, investors can delay payments from a deferred annuity indefinitely. During that time, any earnings in the account are tax-deferred.
Fixed annuities pay guaranteed rates of interest, which makes them appealing to investors wary of the stock market’s ups and downs. What also makes them appealing are their low investment minimums – usually $1,000 to $10,000 – and the fact that the interest they pay escapes taxation until you make a withdrawal. While interest rates tend to be lower, they’re somewhat predictable.