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These Annuity Options Can Help You Plan for Retirement
When planning for your retirement, there are many factors you need to consider. The most important factor is how you receive an income without working a job. Annuities may be the answer to this retirement concern. Discover different types of annuities and their payment options to see how annuities can help you plan for retirement.
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What Is an Annuity?
An annuity is a contract agreement between you and an insurance company that provides you with a steady stream of income for a set amount of time. People get often get annuities for their retirement. Common annuity goals include legacy planning, long-term care costs, principal protection, and lifetime income. The purpose of an annuity is that it gives you limited access to your funds, so you can better distribute them throughout the period of your annuity.
Unlike a 401(k) or an IRA, an annuity has no contribution limits. This means you can save as much as you want. Annuities give people the chance to be more aggressive with their investing strategies since they can expect this income later in life. Annuities are designed to provide you with an income no matter how long you live.
The two main types of annuities are fixed and variable. Each type of annuity has benefits and drawbacks, so it’s important to base your decision on your personal needs, current finances, and predictions for the future.
A fixed annuity is when your insurance company guarantees you a set payment in the future. This could be decades from now or right away. The insurer safely makes investments like highly rated corporate bonds to ensure they can pay you the fixed amount agreed upon. Though a fixed annuity is both predictable and safe, you could lose out on purchasing power due to inflation unless you choose a plan that considers inflation. Fixed annuities are best for people who prefer low-risk options.
A variable annuity is riskier but can lead to a greater payout. With this kind of annuity, your insurer invests in a mutual fund portfolio that you choose. The amounts your account and eventual payout grow depends on how well these funds perform. When choosing this type of annuity, it’s important that you have a good understanding of the mutual funds you choose and the risks associated with them.
How Do Annuities Pay Out?
You can choose from two different annuity payment options: immediate or deferred. You should choose your payment option based on if you want your insurer to pay you now or at a later date. You can choose to have your immediate or deferred annuity be fixed or variable. Both types of payment options have some pros and cons.
An immediate annuity is an annuitization option that occurs right away. With this option, you pay the insurance company a single lump sum and then it begins to pay your income one annuity period after purchase. This can range from 30 days to one year later. Retirees enjoy this option because they want to start receiving their income as soon as possible.
A deferred annuity is an option to receive your payment from the insurance company later. This gives your account more time to increase since it is a long-term saving option. Similar to other retirement accounts, a deferred annuity accumulates tax-free earnings until you choose to withdraw the money. This type of annuity is beneficial for people who want their accounts to grow and need to depend on a steady income in the future.
Other Annuity Payment Options
When choosing your annuity, there are other factors you must consider. Here are some other details you need to decide when picking a payment option:
- Period certain annuity: With this kind of annuity, your insurance company is guaranteed to pay you a specific payment for a set amount of time. This period of time may vary. For example, it could last only a few years or for decades.
- Lifetime payments: This is a guaranteed income payout that only lasts throughout your lifetime. After you pass away, your survivors do not receive any kind of payment or benefit. The payments completely stop upon your passing. How much your insurer pays you is based on your life expectancy and how much money you invest.
- Life with period certain: This type of payment option is a combination of a lifetime annuity and a period certain annuity. If you pass during your set period of payment, your insurer continues the payment intervals until the end of the period, and your beneficiary receives these payments. For example, if your payment period was 20 years long and you pass 10 years into it, your beneficiary would receive payment for the remaining 10 years.
- Joint and survivor annuity: With this kind of annuity, your beneficiary receives your payouts for the remainder of their life after you pass away. Many married couples choose this option so the surviving spouse has financial support for the rest of their life.
Lottery Payout Options
Though annuities are primarily for retirement planning, lottery winners also use them to distribute their winnings over a set period of time. When you win the lottery, you typically choose between a lump-sum payment or an annuity. With a lump-sum payment, the lottery pays you all your winnings at once after taxes. With an annuity, they pay you installments of your winnings over a set period of time.
Lottery winners may choose the lump-sum option if they want to avoid tax implications in the future. One caveat with this type of payment is that you need to be extra careful with spending. A lottery annuity forces winners to be more responsible with their winnings since they cannot spend them all at once.
When it comes to choosing an annuity, there are many options to choose from. Meet with a financial advisor to discuss all of your options and financial goals. It’s important that you choose a contract that is beneficial to you and your loved ones.