Withdrawal Strategies For Retirement Income
Being strategic about the way you withdraw retirement funds can protect your hard-earned savings. Without a solid plan, you may spend too much at the start of your retirement and not have enough money to support your lifestyle as you age. Here are a few different withdrawal strategies you can use to ensure this doesnt happen:
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The Wait Can Be Worth It
Based on this formula, a shorter annuity payout period results in a higher monthly payment. If you want to maximize the guaranteed monthly payment, your best option is to wait as long as possible to annuitize your capital.
Consider a person who invests $250,000 in an income annuity at age 65. If the interest rate is 2.5% and the annuitant’s life expectancy is 15 years, the monthly annuity payout would be $1,663.66. If they wait five more years to annuitize, the monthly payout amount rises to $2,353.54. Wait until age 75, and it becomes $4,433.75guaranteed for life.
How To Decide If A Retirement Annuity Is Right For You
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A retirement annuity can provide a guaranteed stream of monthly payments that lasts the rest of your life. Many retirement experts suggest buying a retirement annuity from an insurance company if other sources of guaranteed income including Social Security and any pension payments wont cover your basic living expenses in retirement.
The potential advantages:
The potential disadvantages:
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When An Annuity Is Not A Good Investment
If youre being sold an annuity without having the chance to look at your entire financial picture, proceed with care. Some people selling them mean well, but they might not have a complete notion of the products they are selling. They might not have a good grasp of the tax issues. Plus, if they havent done any planning for you, they cant see how that product would fit into your retirement picture.
You also want to be aware of the fees that come with the annuity. High fees will lower your returns. High fees in some annuities mean that, in most markets, your purchase will earn low returns.
Dont buy an annuity unless you have crafted a plan and know how it fits in with that plan. Annuities are not going away, so you should not feel pressure or a sense of urgency to buy one until youve done your research. Some sales agents will tell you that an annuity product will only be on sale for a short time. This could be true because insurers will stop selling some of their products from time to time. Still, dont let this fact pressure you into making a choice before you are ready. You will likely be able to buy a product with similar features to the previous one.
Annuities: When Theyre A Good Investment
Letâs be crystal clear. Annuities are insurance products. This means you buy it to mitigate some of the investment risks.
At the same time, not all annuities are alike. With some annuities, such as variable annuities, you can choose from stocks and bonds as investment options. In other cases, they are true insurance rather than investments.
Theres one thing an annuity does extremely well. It can protect you from longevity risk. For those unfamialir, this is the risk of living a lot longer than you expected.
Basically, annuities are ideal if youre healthy and look forward to living a long and meaningful life. If this is the case, annuities ensure you wont outlive your money. So, an annuity can be a wise investment if you are buying it for this reason.
The right annuity might be right for you if you know what you want out of retirement. Aside from that, you should find out how the annuity will help you achieve those goals, as well as what fees and restrictions the product has.
Having an understanding of how annuity income is taxed, what investment options are available, and how annuities work with other investments is also important to know.
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Income Annuities Provide Guaranteed Income That Can Last A Certain Number Of Years Or The Rest Of Your Life
Where will you get retirement income?
For most Americans, retirement income will come from multiple sources. Social Security is the retirement income stream most people are familiar with. But income may also come from accumulated savings and other traditional retirement accounts, such as 401s, IRAs and pensions. For early retirees, this can create some issues:
- Many retirement savings products may penalize you for taking withdrawals before you reach a certain age.
- Social Security benefits dont begin until age 62, and the longer you wait to start collecting your benefits, the more youll receive.
- With personal savings, you may not know how much you can withdraw each year without depeleteing your savings too soon.
How guaranteed income annuities can help
Income annuities can be a valuable part of a retirement strategy because they provide guaranteed income that can last a certain number of years or the rest of your life . In an early retirement scenario, you could use a portion of your savings to purchase an income annuity that is immediately converted into regularly scheduled income payments that can help you:
- Supplement withdrawals from your savings.
- Delay taking Social Security until your benefits payments are maximized.
- Avoid taking early withdrawals from retirement accounts that will penalize you for doing so.
Further reading
Annuities For Retirement: Good Or Bad Idea
Jittery investors who are fearful about outliving their savings may have another investment option to consider in their workplace retirement plans. The Treasury Department has issued new guidelines designed to expand the use of annuities inside 401 plans. Annuities are attractive to some investors because they offer the ability to build tax-deferred savings, can help to protect the money that you’ve already saved, and generate a steady stream of income in retirement.
“Life expectancies are getting longer. With that comes an increased risk of outliving one’s retirement savings,” says Denise Appleby, founder of Atlanta-based Appleby Retirement Consulting. “Annuities can help to prevent that from happening by providing lifetime income for retirees.”
An annuity is basically an insurance contract in which you pay a financial institution a specific amount of moneyeither in a lump sum or a series of paymentsand the company then invests your money and promises to pay you a regular income right away or in the future.
With an “immediate” annuity, you can generally start receiving payments in about 30 days. A “deferred” annuity enables you to receive payments at some point down the road. You put in a lump sum or build up funds over time then you convert that amount, or “annuitize” it, into a income stream.
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It’s also important to keep in mind that annuities can have varying degrees of risk.
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Locking Up Money You May Need
If you suddenly need those funds, it can be difficult to access your annuity investment or cash it out. In some immediate annuities, after investing your principal, you lose access to it even though payments begin immediately. In some cases, you may be able to withdraw your principal or select time periods during which you can do so. But your monthly payment may be smaller. Also, you will usually have a 10% penalty if you withdraw from a deferred annuity before you turn 59 ½.
Variable Annuities: Pros And Cons
Variable annuities share certain features with individual retirement accounts and 401 plans, including tax-deferred growth. As a result, you can hold off paying taxes on gains until you start receiving payouts. Like these other retirement plans, you normally cant make withdrawals before the age of 59½ without incurring a steep 10% penalty.
Annuities may also provide benefits that other retirement vehicles dont have, such as a death benefit for loved ones. Typically, the person you select as your beneficiary will receive either the balance of your account or a guaranteed minimum payment.
Unfortunately, annuities also have some less-appealing characteristics. Among them is less-favorable tax treatment once you hit the annuitization phase. Any growth in your annuity above and beyond your contributions is treated as ordinary income. If youre in a higher tax bracket, that aspect alone can take a huge bite out of your earnings.
Further eroding your account are the notoriously high fees that insurance companies charge their annuity customers. Youll really feel the squeeze if you take money out of the policy within the first few years and incur a surrender charge. The amount of this fee is usually based on the amount you withdraw, with the percentage gradually decreasing over a period of several years. For example, taking funds in year one may incur an 8% charge, while a withdrawal in year eight only takes a 1% hit.
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What Is A Mutual Fund
A mutual fund is a pool of investments owned by many investors. These investors buy shares in the fund, and the fund invests the money, based on its stated objective. Mutual funds include choices in major asset classes such as equities , fixed-income and money market securities. Investors share in the gains or losses of the fund, and returns are not guaranteed.
Do Mutual Funds Or Annuities Offer More Income Options In Retirement
Both mutual funds and annuity accounts offer you an array of choices for your retirement savings needs. But investing for retirement is only one part of preparing for your financial future its just as important to determine how you will receive income in retirement. Annuities generally offer more options when it comes to obtaining this income.
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Annuities: When Theyre A Bad Investment
Do not purchase an annuity without checking your entire financial picture first. There are some people who sell them with good intentions, but they may not have a complete understanding of what theyre selling. For instance, their understanding of tax issues might be limited. In addition, they cannot see how the product fits into your retirement plan if they havent done any planning for you.
It is also important to be aware of the fees associated with annuities. After all, your returns will be lower if you pay high fees. And, in most markets, you will not earn a lot of money from some annuities due to high fees.
If you do not have a plan in place, never buy an annuity. So, until you have done your research on annuities, you shouldnt feel pressured or obligated to buy one.
You might hear from a sales agent that an annuitys sale will be short-lived. There are times when insurers stop selling specific products, which could explain this. Even so, you should not rush into making a decision. And, always remember that a similar product will likely be available elsewhere.
Annuities Vs Mutual Funds
The Pennsylvania State University Retirement Plan offers both mutual funds and annuity accounts. What are the basic differences between these two options, and which may be right for you?
To make the right choices for your portfolio, its helpful to understand these investments. When creating your retirement portfolio, you need to consider whether mutual funds, annuity accounts or a combination are right for your savings goals.
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Seven Pros Of Adding An Annuity To A Retirement Portfolio
Fixed Index Annuities: Consider The Alternative
After conducting exhaustive research for his 2018 study, Ibbotson concluded annuities are a good investment for retirement savings not just for income during retirement.
The 20-page report focuses on uncapped Fixed Indexed Annuities which he says, if structured properly, can help control financial market risk, mitigate longevity risk, and may outperform bonds over time.
Recent innovations in annuity product design, combined with an increasingly competitive marketplace, have given individuals preparing for or in retirement powerful and more affordable tools to not only mitigate retirement risks but also to serve as a vehicle to increase wealth leading up to retirement.
Ibbotson along with an impressive team of experts at Zebra Capital Management ran hypothetical return simulations from 1927 to 2016.
Their research found that net of fees, fixed index annuities had an annualized return of 5.81%, compared to 5.32% for long-term government bonds and 9.92% for large-cap stocks over that period .
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How Does An Annuity Work
An annuity is an arrangement in which the owner of the policy transfers the risk to an insurance/annuity company. Through the premiums it charges, the company offers the annuity assumes the risk for the owner. Annuities can have a single payment or several payments, depending on the type. Premiums are paid during the accumulation phase.
As opposed to other types of insurance, annuities do not require continuous premium payments. As time goes on, youll no longer need to make annuity payments and will begin receiving payments instead. This is when the payout phase of your contract begins.
There are a number of ways in which annuities can be paid. You can design an annuity to provide you with payments throughout your lifetime or the lifetimes of your heirs. You can also combine a lifetime income stream with a guaranteed payout over a specified period.
How does a âlife with a certain periodâ annuity work? It promises lifetime income. But, your beneficiary will receive the remaining value of the account if you die within a specific timeframe.
It is common for annuities to be paid over an extended period of time. Like Social Security, they are also based on life expectancy. As a result, if you begin receiving income much earlier in life or if the term is longer, you should anticipate smaller payments.
Annuities can be paid monthly, quarterly, annually, or even as a lump sum. Furthermore, they can be begun immediately or deferred for a long time.
Fixed Vs Variable Annuities
Fixed annuities guarantee a specific interest rate on money invested in the contract, with the insurance company choosing and managing the investments. The interest on variable annuities, by contrast, can fluctuate because it is based on the performance of the owner’s investment portfolio for the annuity. Thus, fixed annuities have more predictable returns than variable ones.
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Why Would You Put An Annuity In An Ira
An annuity invested in an IRA provides tax deferred growth and a guaranteed income stream. There is no extra cost for the tax deferral, she said. … They ask why someone should pay the higher cost of investing in an annuity when you can get tax deferred benefits in an IRA which will most likely have lower fees.
When Variable Annuities Can Make Sense
Because of the additional costs that annuities tend to incur, experts generally advise against putting these contracts inside an IRA or a 401. These plans already offer tax-deferred growth theres no point in doubling up on this benefit.
Where variable annuities may be worth a look is if youve maxed out your contributions to other tax-advantaged accounts. If thats the caseand you want the peace of mind that lifetime payments providethese insurance contracts merit some consideration. Your best bet is searching for one with relatively low costs from an established company with a strong financial rating from agencies such as A.M. Best and Moodys.
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What Is An Annuity And How Do They Work
Simply put, an annuity is a financial contract between an insurance company and an individual that allows the individual to pay money now in exchange for a guaranteed and steady stream of income in the future. The individual who has the annuity either pays for it all up front or in a series of regular payments.
As the names would suggest, an immediate annuity begins paying out right away, while a deferred annuity begins paying out after a certain amount of time. Annuities can also use a different structure depending on the needs of the individual. They can pay out over the course of a lifetime, or they can pay out for just a set amount of time.
There are also two other annuity structures: fixed and variable. With a fixed annuity, the rate of return for the individual investor is set and wont fluctuate throughout the life of the annuity. Some fixed annuities can be indexed to a specific index fund or market index as well.
When it comes to a variable annuity, the insurance company you buy the annuity from will invest your money in different funds and accounts, paying out based on the performance of those funds and accounts. You can also be in control of the investments in your annuity if you have a variable contract. On the other hand, it can also be riskier in the case of a .
