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Annuities & Retirement Planning
Over the past few years, retirement planning has become increasingly complex. Today, you need to balance a wider range of financial issues than ever before; from IRA and 401(k) accounts, to estate planning, income distribution strategies, tax changes and even how working will affect your Social Security benefits. Adding more complexity to this is the fact that people are living longer than ever – making retirement more expensive – highlighting why good, solid retirement planning has become so critical. When you combine the above with the tumultuous economic and political environments we are witnessing at both the national and international levels, it is not difficult to see how timely and important the notion of safe money has become.
What is an Annuity?
In its simplest definition, an annuity is an amount payable annually. For our purposes, however, an annuity describes a contract offered by an insurance company that allows you to accumulate funds for retirement on a tax-deferred basis. Upon retirement, you'll receive income from the annuity that can be guaranteed by the insurer to last either a fixed number of years, or as long as you live.
What is safe money?
We've all seen the headlines… the slow economy, political instability, the mortgage meltdown, never-ending budget deficits, skyrocketing health care costs – the list goes on and on… It doesn't take a financial professional to tell you that this has created a climate that puts a premium on solid retirement planning and a focus on stability.
Given this context, what exactly is "safe money?" As you might expect, it means different things to different people. To a younger investor it might mean taking a calculated risk on a portion of their investment portfolio. To a pre-retiree it might mean money that will be there when it is needed. For a retiree it might be money that is truly risk free.
Regardless of the definition of safe money that fits your situation, a new trend is developing within the retirement planning world, where "income" has displaced "cash" as the new King. All of us, from the young investor to the retiree, can and should be looking for safe, stable returns that ensure our retirement savings are not swallowed up by market downturns or depleted prematurely.
The New Retirement Rule - Safe Money
So if the old adage, "Cash is King" is no longer true – especially for the new few generations of Baby Boomers, then what is? That answer is simple: Income is the New King.
How could a long-standing investing rule have changed so drastically? How could an entire group of people (Baby Boomers) be so dependent on income? How could the "live free" generation be so concerned about their financial security?
Remember, financial security begins by asking important questions:
- When are you planning to retire?
- What is your "time" horizon?
- How do you avoid risk?
- Where do you invest?
- Whom do you trust?
- Is safety & security even a possibility anymore?
The interesting (and critical) takeaway here is that the questions for the Baby Boomer generation are no different than for previous generations, but the answers are different. How do we guarantee income that will last our whole lives? How do we increase our standard of living? What decisions are right for us at this juncture?
Annuities… the first step towards Safe Money!
Annuities are an important part of any retirement plan as they are safe, secure and risk free. An annuity allows you to accumulate funds for retirement on a tax-deferred basis, and upon retirement you'll receive income from the annuity that can be guaranteed by the insurer to last either a fixed number of years, or as long as you live.
A quick summary of annuity benefits includes:
- Tax deferred earnings
- No contribution limits
- Flexibility in distribution / payouts
- No forced distributions
- Proceeds not subject to probate
Annuities represent a formidable option for someone looking to enhance their retirement planning strategy. Not only do they add to the mix of tax-deferred growth you may be getting from your IRAs or 401(k)s, but they also offer significant investment and distribution options.
There are many types of annuities, offered by many insurance companies. The first step is to speak with a qualified professional to receive an annuity quote so you can best gauge how an annuity would fit into your specific financial plan.
Different Annuity Types Offer Various Possibilities
Annuities come in all shapes and sizes, but which one is right for you?
The annuity options are plentiful and include:
- Immediate Annuity
- Deferred Annuity
- Fixed Annuity
- Variable Annuity
The immediate annuity gives you the ability to receive income immediately for a set period of time or for the remainder of your life (can be received on monthly, quarterly, semi-annual or annual basis). The choice of contracts includes fixed immediate annuities (guarantee level payments regardless of how market performs) and variable immediate annuities (offer regular fluctuating payments that reflect the performance of the equities whereby they are invested). This option proves especially good for individuals who are nearing retirement and find the need to supplement their income.
The deferred annuity comes into play if you are searching for a fixed income only after a certain period of time. This allows the income you invest to keep on growing and collecting, only coming to you once you are really in need of it. Remember that the income accumulates and multiplies on a tax-deferred basis, with the annuitant only paying taxes once they begin to withdraw the money. Deferred annuities also offer a death benefit, meaning that if the annuitant dies, the annuity income is paid to their heir, including any investment income that was accrued. This form of annuity is best for those individuals who still have some time remaining before retirement.
For the fixed annuity, you have a financial vehicle that pays you a fixed income monthly from the time that you decide to begin getting money. The rate of return or the money, which is tax deferred, that you receive monthly is pre-determined and will not change. This kind of annuity is best for those individuals who are not big risk takers and like knowing how much money is coming their way each month.
The variable annuity will invest your money in stocks and bonds, and that income is subject to change each month due to market fluctuations. The income grows on a tax-deferred basis, and the annuitant can decide to receive the returns immediately or over a long-term basis. The majority of variable annuities also make available a fixed account with a present interest rate declaration as an option for allocating premium or current assets. This product is a good selection for those individuals who are younger and not fearful of the market changes.
Annuity Benefits and Downsides
Like any investment vehicle, annuities have both their benefits and their disadvantages. Certain annuity types are better than others, but in general, the decision on whether an annuity is right for your retirement portfolio will depend on your particular financial profile. Consider the following benefits and downsides of annuity investment:
- Lifetime Income Stream
- Tax-deferred Growth
- Competitive Fixed Interest Rates
- Protection Against Market Downturns
- Death Benefit Options
- Access to a Portion of Your Money
- Administration Fees
- Early Withdrawal Fees
- Taxed as Ordinary Income
- Opportunity Cost of Locking In a Low Fixed Rate
How Annuities Work
Our website will give you a solid foundation about annuities and will help you understand how they work, but in practice the choice of an annuity and an annuity contract can be tricky. Today, most insurance companies offer custom-tailored annuities for every imaginable financial situation. Are you married, widowed, or divorced? What is your investment risk-tolerance? How diversified is your retirement savings? Do you own your own home? Do you run your own business? Answers to these questions ultimately determine which annuity is best for you. We invite you to look around our site, and then call us today to get a Free safe money Guide & Personalized Annuity Quote - the best and fastest way to see for yourself whether an annuity is right for you!
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