5 Ways Annuity Insurance Retirement Plan Can Help You. Don't Run Out of Money When You Retire
Are you afraid that you will outlive your money? Are you worried that you might lose your savings in the stock market and face retirement broke? The past few years in the stock markets have upset the retirement plans of many investors.
Today, people are living longer than ever. Seniors and baby boomers are concerned that they have enough money to support them during a long life. Annuities are an investment option for these people. Annuities guarantee that you won't outlive your income, no matter if you live 100 years or longer. Furthermore, with an annuity you do not risk losing the nest egg you have accumulated.
What Is Annuity Insurance?
An annuity is an insurance product sold by a life insurance company. The annuity contract guarantees you, the owner, monthly cash payments, as long as you live. It is not a life insurance policy, that pays only when you die. An annuity pays you while you are living. The advantage of an annuity is that your earnings grow tax deferred until they are withdrawn, much like other retirement plans. And, unlike other retirement planning options, like a 401(k) 403(b) or IRA, there is no limit on how much money you can put into an annuity. Annuity contracts are complicated. it is important that you understand what you are buying.
If you are planning for retirement, you make payments into the annuity and earn a specified rate of return. You can also invest a lump sum in the annuity. This is called the accumulation phase of the annuity. Then when you retire, you receive a series of guaranteed cash payments over your lifetime. This is called the annuitization phase of the annuity.
Annuity insurance retirement plans are ideal for people who have saved a nest egg, but worry that they will run out of money. They are also anxious to protect their capital. If you are retired, or thinking about retirement, you are probably not concerned about building a bigger estate. You are more concerned about money for your living expenses. How much have you accumulated in your IRAs, 401(k) and pension plans? Is is possible that you could outlive your retirement savings?
Options for Your Annuity Insurance Retirement Plan
The annuity insurance plan can be designed to fit your needs as you anticipate them. Several options are available.
- As an option, you choose when you want to receive payments, immediately or at some future date.
- As an option, you can also choose if payments continue throughout your life or else for a specified period of time.
- As an additional option, you may also choose that a guaranteed death benefit be pay your beneficiary, so if you die before you retire, your savings will not be lost. With this option, your family does gets back every cent you put into the annuity, plus whatever the annuity has earned.
- You also have the option to specify an annuity "term certain." You specify the guaranteed period of time for your monthly payments. Usually, if you retire at 65 and die at 67, the insurance company keeps the balance of money in your annuity contract. However, if you specify a contract with 10 years "term certain," you and your beneficiary are guaranteed at least 10 years of payments, no matter when you pass away.
Are my Annuity Insurance Plan Payments Taxed?
The money you invest in the annuity is never taxable, because you have already paid income taxes on it. What your annuity earns over time is not taxable until you actually begin to receive payments from your annuity. Once you receive payments, the gains, and only the gains, are taxed at your ordinary income tax rate. Your tax advisor has a tax table to figure out how much of each annuity payment is taxable interest, and how much is a nontaxable return of your investment. If you die before payments start, your beneficiary pays taxes on the death benefit.
If you withdraw money from your deferred-payment annuity before age 59½ for reasons other than death or disability, there is a 10 percent penalty tax.
How Much will My Annuity Insurance Retirement Plan Earn?
There are generally three types of annuity insurance retirement plans
: Fixed Annuity, Variable Annuity and Indexed Annuity. Your earnings depend on the plan you choose. Most people buy annuity insurance retirement plans primarily for their security, rather than their earnings.
If you buy a Fixed Annuity, the insurance company guarantees that you will earn a minimum rate of interest during the time that your account is growing. The insurance company also guarantees the size of the payments you receive. When you choose an annuity with a fixed interest rate, your annuity grows at the same rate every year, no matter what the financial markets do.
With a Variable Annuity, you can choose to link your return to the performance of different investment options, typically mutual funds. The interest rate your annuity earns grows and falls with the financial markets, but you are always guaranteed a minimum return. The rate of return on your money, and the size of the periodic payments you will eventually receive, depend on the performance of the investment options you have selected. The insurance company recalculates your payments each year based on the performance of your investments.
If you buy an Indexed Annuity, your money earns interest based on the performance of a particular stock index, such as the Standard & Poor's 500 Index, the Dow Jones Industrial Average, the NASDAQ Composite Index, or the Russell 2000 Index. When the index goes up, your interest rate increases and the value of your annuity increases. The insurance company guarantees you a minimum rate of return, and you never lose your original investment. You have stability and the possibility of modest gains. After retirement, the amount of your payment is fixed.
The Surrender Fee for an Annuity Insurance Retirement Plan
If you buy an annuity and then decide you want to get out of the contract, you can surrender your annuity. Most companies charge you a surrender fee if you decide to get out your annuity within the first seven or eight years after you buy it. Surrender fees are higher in the early years of the annuity. For example, if your annuity has a seven-year surrender period, and you surrender your annuity in the first year, you may pay 7 percent of the value of your investment to the company. If you surrender in the second year, you may pay 6 percent, and so on.
The 5 Essentials Points of an Annuity
Insurance Retirement Plan
You are guaranteed that you will never lose your invested money.
- You are guaranteed that you will never outlive your money. Your annuity checks continue as long as you live. An annuity is a protection against outliving your savings. It is a way of insuring your savings.
- In exchange for these guarantees, you are charged an annuity fee, which can be higher than the fees with other types of investments.
- The disadvantage of annuity insurance is that you will not participate in exciting stock market gains when they come. Another disadvantage is that the purchasing power of your annuity checks can be undermined by inflation.
- Only invest with a financially strong insurance company. Most, though not all, states have "guarantee associations" or "guarantee funds" to protect you if the annuity provider becomes insolvent. Most states guarantee up to $100,000 of the current value of the annuity.
If your goal is to make a pile of money, annuity insurance is not the retirement plan for you. Of course, with high returns in the financial markets comes high risk. If your financial goal is security and peace of mind, annuity insurance may be worth a look.
This information is not intended as financial or legal advice. Consult your lawyer or registered financial advisor for your personal recommendation.
I hope life brings you much success.
The Retirement Coach
More about your retirement
Here's the index of Sam's easy how-to-do-it articles.