Layin’ It on the Line: Contractual Guarantees Can Boost Your Retirement Income | News, Sports, Jobs
Every decade people are living longer. From 1960 to 2019, the average life expectancy of Americans increased from 70 years to 79 years, while the retirement age increased slightly to 67 in 1983. Due to this gap between retirement and the ‘life expectancy, retirees must manage their wealth, for the possibility of surviving their money. Of course, most retirees are not millionaires and their salary years are far behind them. But it’s not the size of the fund that matters so much; that’s how you intend to use it. Annuities are popular financial products that can help individuals’ retirement savings go the distance.
A retirement savings vehicle in any retirement planning toolkit is the fixed annuity. Fixed annuities are sold by insurance companies and offer a long-term investment option that pays monthly income based on principal and time to first withdrawal. Retirees can purchase fixed annuities with a single lump sum or a series of smaller payments. In exchange, the insurer guarantees a minimum interest rate on the deposit. The guaranteed minimum interest rate is usually between 1% and 2%, while the best fixed annuities can have rates higher than 2%.
Annuities fall into two categories, immediate and deferred. An immediate fixed annuity will begin to be paid within one year of signing the contract. A deferred annuity will start paying in the future; it can be as early as a few years or as long as 20 years. Each product is specialized to provide various benefits specific to investors’ goals.
Payout annuities work by converting a large amount of money into a stream of income. Investors make a one-time payment, an annuity option is selected, and distribution begins 12 months after purchase. Each distribution is both a return on the initial investment and a profit. The only taxed part of the distribution is the profit part. This type of annuity would be more attractive to investors looking to avoid outliving their investment.
Deferred annuities are no different from immediate annuities because they both convert investors’ money into an income stream. Investors purchase deferred annuities with a lump sum or a series of smaller payments and defer repayment to a later date. Known as the accumulation period, gains made during this phase remain untaxed until distributed. This is an attractive option for those looking to supplement IRAs, retirement plans, and 401(k) plans.
Immediate annuities and deferred annuities allow unlimited contributions and provide a continuous stream of income for life. Both terms indicate when the distribution phase will begin. Either way, fixed annuities provide investors with the means to be financially responsible and play a vital role in building a safe and sound retirement plan.
Lyle Boss, originally from Utah, is a member of Syndicated Columnists, a national organization committed to a completely transparent approach to money management. Boss Financial, 955 Chambers St., Suite 250, Ogden, UT 84403. Phone: 801-475-9400.