Retirement Planning Options Annuities

Transcription

1 Retirement Planning Optins Annuities Everyne wants a glden retirement. But saving fr retirement is n easy task. The baby bmer generatin is graying. Mre and mre peple are appraching retirement age. With Scial Security s assets being cnsumed and the number f wrkers that will supprt it shrinking, we will have t rely mre n ur persnal savings when it s time t retire. Tday, we have myriad ptins t help each f us prepare fr the glden years. Yet, withut a specific plan f actin, many peple find themselves falling shrt when it is time fr them t live ff f their life s wrk. Sme f the mst pwerful retirement savings tls are emplyer spnsred retirement plans, such as 401(k)s, and f curse IRA and Rth IRA accunts. Fr certain situatins, annuities may have a place in the retirement savings/retirement planning tlbx. This article discusses annuities. Take the time t review yur ptins, and ensure that yu re prepared when it s yur turn t retire. Annuities Annuities are flexible insurance cntracts designed t prvide incme and help yu achieve lng term savings gals. Much like a CD is a cntract between yu and a bank, an annuity is a lng term cntract between yu and an insurance cmpany. In essence, the same cmpany that insures yur hme r prtects yur family may als help yu save fr retirement. After making a single lump sum premium payment, r a series f peridic payments, individuals can then receive regular annuity payments frm the insurance cmpany. These payments can be made ver a definite perid f time, r they can last a lifetime. Payments t the annuity wner can als be tailred t begin after the cntract has been established fr a number f years, r they can begin immediately after the first premium payment is made. Annuity wners have the chice f receiving regular fixed interest rates (better knwn as a fixed annuity), r having their annuities grw depending n the grwth f underlying variable accunts (referred t as a variable annuity). Over time, insurance cmpanies mdified and enhanced bth types f annuities; hwever, their basic premise has always remained the same. And because annuities are issued by an insurance cmpany, Cngress allws them t grw tax deferred under current tax laws. Myriad Optins. Tax deferral is nt the nly reasn why annuities have mushrmed in ppularity. While they typically have maturity dates f 5 7 years, annuities require n medical exams, and can usually be pened by filling ut a basic annuity cntract. Tday, there are hundreds f annuities t chse frm, designed fr different retirement gals. When it cmes t fixed annuities, insurance cmpanies smetimes ffer higher initial rates t attract wuld be buyers, while ther

2 cmpanies prmise cnsistent interest rates thrughut the life f the annuity cntract. Rates, maturity perids, and death benefits are just sme f the ptins t lk fr in a fixed annuity. Mdern variable annuities als give yu the ptin f directing hw yur mney shuld be invested in separate accunts. These accunts are ffered by sme f the mst respected mney managers in the industry. Many mutual fund cmpanies will als ffer variable accunts that clsely mirrr their mutual funds in terms f perfrmance, hldings and risk. During the late 1980s, insurance cmpanies began bundling mre f these segregated accunts inside their variable annuity prducts. T remain cmpetitive and increase brand awareness, well knwn mney managers began ffering even mre variable annuity accunts, in additin t their existing mutual funds. Yu can find many f the mst ppular mney managers in tday s variable annuity. When yu wn a variable annuity, yu can tell the insurer which underlying accunts yu wuld like t use. The value f the annuity cntract will then vary depending n the perfrmance f the separate accunts yu chse. These variable accunts may rise r fall in value. Hwever, with variable annuities, yu can invest in a number f different ptins withut additinal csts r transactin fees. Plus, many insurance cmpanies will ffer a death benefit that will never be lwer than the amunt yu riginally invested. With tday s variable annuity, yu can tailr yur retirement accunt t meet yur wn individual needs. Annuity Flexibility. Annuities are a flexible savings vehicle. Yu can use after tax mney t depsit int an annuity, r yu can fund yur annuity by rlling ver qualified mney. A rllver int annuity shuld be carefully cnsidered as there are additinal internal csts in the annuity that may nt be adequately ffset by any advantages that might be gained ver a traditinal rllver int an IRA rllver accunt. Fr example, traditinal IRA and 401(k) wners can transfer their accunts int a qualified annuity, which maintains their tax preferred status. In sme cases, annuities will ffer fixed interest rates, added death benefits, r ther features frm the insurance cmpany that are nt available in a qualified retirement plan. Nn qualified (r after tax ) annuities are just as ppular. Because n rllver frm anther accunt is invlved, nn qualified annuities ften require less time t establish. In additin, when yu withdraw funds, yu ll nly pay taxes n yur accrued interest, since yur principal was already taxed nce befre (when yu earned it). Up until this pint, we ve fcused primarily n ptins available during the accumulatin phase. But what abut the payut phase, when the annuity returns its value t yu? Frtunately, annuities can als prvide incredible flexibility during the payut phase, as well. When the payut phase begins, yu can pt t receive yur annuity s value in ne lump sum, r yu can elect t receive a steady stream f payments in regular intervals (e.g. mnthly, quarterly, etc.). If yu decide t pt fr a regular stream f payments, many insurers will allw yu t have annuity payments last fr a set amunt f time (such as 10 r 20 years). Many cntracts als allw yu t receive payments fr as lng as yu and yur spuse live.

3 Fr many annuity wners, having indefinite payments fr the rest f yur life prvides a predictable surce f incme. Sme variable annuities will even let yu chse between fixed payments, r payments that fluctuate based n the perfrmance f mutual fund investment ptins. As a rule f thumb, the lnger yur payment perid, the smaller yur payments will be. These cnditins are clearly spelled ut in the terms f the annuity. Want mre flexibility? Sme annuities are designed t be immediate annuities. Immediate annuities have n accumulatin phase whatsever. They begin paying yu in regular increments the mment yu purchase the cntract. Chices t Cnsider. When shpping fr an annuity, there are several cnsideratins that must be weighed. Fixed vs. Variable. Fixed annuity wners appreciate stability. Owners f fixed cntracts knw exactly hw much their cntract is earning, and when interest will be credited. Fixed annuities ffer assurances that yu just cannt find anywhere else. Hwever, fr thse that believe they can d ne better than the insurance cmpany s interest rate, then a variable annuity may be an ptin. Variable annuities allw yu t enjy the upside f the market. Plus, sme insurers minimize dwnside risk by guaranteeing that yur annuity value will nt decrease belw yur initial premium. Sme annuities are als designed t mimic the perfrmance f the market, such as the S&P 500. These scalled indexed annuities prvide a way t track perfrmance, since market figures are readily available via the press. Hwever, these are ften very cmplex cntracts with cmplicated frmulas fr calculating what rate f return yu actually get. Cautin in purchasing an indexed annuity prduct is advised. Immediate vs. Deferred Incme. When it cmes time t withdraw yur mney ut f an annuity, yu have a variety f payment ptins t chse frm. The insurance cmpany can pay yu either in a lump sum, make peridic payments, r guarantee yu a lifetime f incme n a tax advantaged basis. Depending n the annuity cntract yu purchase, the chice is yurs. Qualified vs. Nn Qualified. Annuities can accmmdate qualified r nn qualified mney. Insurance Cmpany. The quality f the insurance cmpany is imprtant, especially when purchasing a fixed annuity. Wrking with a respected, highly rated insurer can help eliminate default risk, and ensure a retirement incme when yu need it mst. Variable annuities, unlike fixed annuities, are nt cmmingled in the insurer s general fund. The separate accunts inside a variable annuity prvide an extra hedge f prtectin shuld the insurance cmpany run int prblems. Nevertheless, the quality f the insurer is vital, especially if yur variable annuity has any additinal death benefits r rate guarantees.

4 Cmmn Benefits. All annuities, fixed r variable, share several cmmn benefits. Here s a summary f what annuities can bring t yur retirement prtfli: Ideal fr Estate Planning. Prceeds frm annuities pass directly t yur beneficiaries withut the delay, expense, and publicity f prbate in mst states. If yu ve ever had a lved ne s estate g thrugh this timecnsuming legal prcess, yu knw just what kind f advantage this is. The Pwer f Tax Deferral. Because yu d nt pay taxes n earnings every year, yur annuity is able t wrk harder thanks t tax deferral. Yu will have t pay taxes n earnings when yu withdraw yur annuity s gains, but at least yu can decide when that happens. N Cntributin Limits. Cntributins t ther retirement savings vehicles, like 401(k)s and Individual Retirement Accunts, are limited t IRS guidelines n cntributin. Annuities, hwever, ffer cntributin flexibility. Yu can cntribute as much as yu want, up t the limits impsed by the insurer, t take advantage f tax deferral r variable accunts inside the annuity. Plus, yu can add t yur annuity cntract at any time. Flexible Payment Optins. Unlike 401(k)s and IRAs, which require that yu begin making withdrawals at age 70 1/2, yu may be able t wait much lnger with annuities. When yu d decide t begin receiving payments, yu can usually select ne f the fllwing methds: Lump Sum distributin (a ne time payment) Peridic distributins (yu can take mney nly when yu need it) Systematic distributins (a fixed r variable amunt is sent t yu at regular intervals) Annuitizatin (fixed r variable payments, guaranteed fr the rest f yur life) Tax Cntrl. The mney inside yur annuity is made up f tw cmpnents principal and earnings. Assuming yur annuity was pened with after tax dllars, yu re nly taxed n yur earnings. Different distributin methds behave differently when it cmes t taxes; fr instance, Lump Sum, Peridic, and Systematic distributins exhaust all earnings (which are taxable) befre tapping principal. Under annuitizatin, each payment cnsists f bth principal and interest, spreading yur tax liability evenly amng payments. Thrugh these distributin ptins, yu have cntrl ver when yu will pay taxes n yur earnings. Annuities are nt perfect when it cmes t tax cntrl. If yu shuld pass away while yur annuity is accumulating, all deferred taxes n yur grwth will becme due, reducing yur annuity s value. Easy t Start and Maintain. Usually, a simple applicatin, a check, and yur signature begins yur annuity. And, at the end f each year, yu will nt receive a 1099 fr incme earned within yur annuity cntract.

5 Other Features. Annuities als d nt ffset Scial Security benefits like bnd, CD, and ther investment incme des. Annuities are easy t establish and ften cme with a free lk perid. Yur state f residence r the annuity cntract will define a length f time (usually 30 days) where yu can cancel yur cntract if yu decide it s nt right fr yu. Yu can even exchange lder, nn perfrming annuities int a newer fixed r variable annuity with n tax cnsequences, thanks t Sectin 1035 f the Internal Revenue Cde. If yu are a cnservative investr lking fr a cnsistent way t build yur retirement savings, then fixed annuities may be a viable financial planning tl fr yu. Hwever, if yu are financially savvy and believe yu can d better chsing yur annuity s directin, variable annuities ffer yu mre flexibility and cntrl.