Fixed Vs Variable Retirement Annuities
Individuals can typically buy into a retirement annuity with either a lump-sum payment or a series of payments. With a fixed product, you know ahead of time how much youll receive once the annuitization phase beginsthat is, when the insurer starts making payments back to you. Thats because the rate of return is fixed for a predetermined number of years or for life. Generally, that rate is in the ballpark of what a certificate of deposit would pay, so they tend to be pretty conservative. Other fixed annuities called income annuities , depending on your age, can offer rates that are significantly higher than CD rates and most bond coupon rates, with greater safety than bonds.
Variable annuities work differently. Your return is based on the performance of a basket of stock and bond products, called subaccounts, that you select. Theres a bigger opportunity for growth compared with a fixed annuity, but theres also more risk. However, the insurer may allow you to purchase a rider that offers a guaranteed minimum withdrawal, even when the market does poorly.
Saving With Annuity Due
Note that the difference between an annuity due and an ordinary annuity also applies when you are making deposits to a savings account. If you make your regular deposit at the beginning of the month rather than at the end of the month, your savings will pile up a little faster. This is a great thing to keep in mind especially if you have a specific savings goal, such as saving for retirement.
Things To Consider Before Applying
An annuity is just one of your options for using your pension savings and its not the right choice for everyone. There are some things you need to be aware of.
- Once an annuity is set up, you can’t usually make any changes to it or get back any of the lump sum you used to buy it with
- All annuity payments stop when you die unless youve chosen a protection option that pays a spouse, partner or other dependant
- Depending on how long you live, you may get back less from an annuity than you paid for it
- You dont need to buy an annuity from your pension provider. Its a good idea to shop around to make sure you get the right deal for you
Don’t Miss: When Can You Get Your Retirement Money
What Are The Different Types Of Annuities
There are many different types of annuities. Each one has their advantages. Our customers genuinely know Due as a fixed annuity program as we payout monthly, but many people can fit their type of annuity into our program. Deferred Annuity – A deferred annuity is a form of annuity that Due offers. This is for people like me and you what want to build up a nest egg annuity before we retire. We defer our payments until a future date. In most cases when you retire at 65. Deferred annuities are very popular for people looking to have guaranteed income in the future. Some people prefer to defer these payments until they stop working which could be long into their 70s. Its really up to you!Fixed Annuity – Fixed annuities are fixed interest investments issued by insurance companies like Due. These types of annuities pay guaranteed rates of interest. We find these genuinely are higher than bank CDs. In most cases you can defer income to a later date or draw income immediately (if youre wanting to get money right now. We offer both options for fixed annuities. Our customers love the guaranteed fixed investment to help them predict their retirement.
Your Other Sources Of Retirement Income
Your retirement income may come from a number of places.
This may include:
- employer pension plan or Pooled Registered Pension Plan
- registered savings, such as a Registered Retirement Savings Plan or a Tax-Free Savings Account
- public pensions and benefits, such as Old Age Security , Canada Pension Plan or Quebec Pension Plan
- personal savings and investments
Having an annuity can make it easier to create a budget and manage your money. Its especially the case if you dont have another regular source of retirement income.
However, an annuity may not be the best option for you if your regular income and savings will already cover your expenses when you retire. Speak with a financial professional to figure out whether youll have enough money for your needs when you retire.
Who Should Invest In Annuities
If you would like to secure reliable income for retirement, annuities can be a plank in your investing strategy. Setting up an annuity with lifetime payments can help insulate you from the ups and downs of the market, and provide a predictable stream of income.
Annuities could also be useful as a long-term savings plan. Unlike tax-advantaged retirement accounts, there are no annual contribution limits for annuities. Between their variety of investment options, performance guarantees, and tax benefits, they can be an effective way to build more wealth, especially if youve maxed out your retirement plans.
How Much Retirement Income Will I Get From An Annuity
Your retirement income and whether or not you should buy an annuity will depend on:
- the size of your pension pot
- how old you are when you buy your annuity
- how long you want the annuity to last for a fixed term or for your lifetime
- annuity rates at the time you buy
- where you expect to live when you retire
- your health and lifestyle
Read Also: Moving Retirement Funds To Ira
What Happens To The One Third Cash Lump Sum
The first R500 000 of the one-third lump sum is free of tax, whilst the balance is taxed on a sliding scale as discussed under the tax benefits of retirement annuity. The one-third cash lump sum is typically utilised by the retiree to pay off capital debt thereby allowing the retiree to be free off debt at retirement.
The investor does have the option to invest the entire retirement capital to purchase a compulsory annuity, i.e. retirement income. As the term income indicates, the compulsory annuity will be subject to tax.
What Should I Do Next
Before you make any decisions about your pension, consider the consequences:
Don’t Miss: When Retired What Is Considered Income
How Does A Retirement Annuity Work
Blevins explains them pretty simply, “A retirement annuity is like having a paycheck in retirement, that you’ll continue to receive no matter how long you live.”
An immediate annuity is purchased with one lump sum, and you start receiving payments pretty much right away. Some companies also offer deferred annuities, where you purchase your annuity with a lump sum but choose a time in the future to start receiving payments. The general goal of both is the same though – to receive payments for the rest of your life.
Changing Or Cancelling An Annuity
When you buy an annuity, you enter into a contract with the annuity provider. Typically, once you buy an annuity, you cant change the terms of the contract. This means you cant switch to a different type of annuity or get your money back.
Your annuity contract may have a cooling-off period. This means that you can cancel the contract without a penalty within a specific amount of time. Be sure to read your annuity contract carefully to see if it includes a cooling-off period.
The contract may give the option to cancel within a certain time period after you start receiving payments. There is usually a fee to do this which can be a percentage of the purchase price.
Contact your annuity provider for more information about the contract and your rights to change or cancel an annuity.
If you are thinking about buying an annuity, speak with a financial professional. They can help you figure out whats right for you, when to buy it and when to start getting payments.
Recommended Reading: What Steps Should Be Taken In Retirement Planning
Joint And Survivor Annuity
A joint and survivor annuity pays monthly benefits for as long as either the annuity holder or a beneficiary is alive. Typically, the beneficiary is the spouse. The joint and survivor annuity thus funds both spouses retirements.
There is, however, a drawback to the joint and survivor annuity. That is, the monthly payout will be smaller than for a single life annuity purchased for the same dollar value. Another wrinkle on the annuity concept can help address this concern while still leaving a surviving spouse some income, at least for a time.
How Does An Annuity Work
An annuity can provide you with a predictable stream of income in retirement. The primary benefits of an annuity include:
Predictable payments: Annuity income payments may be guaranteed for a set period of time or until the end of your life, or the life of your spouse or another beneficiary.
Tax-deferred growth: Money paid into an annuity grows on a tax deferred basis. When you later receive annuity payments, the earnings portion of your payments is taxed as ordinary income, while principal is generally free of tax.
Death benefits: Depending on the type of annuity you choose, a named beneficiary can receive payments after you pass away.
A variety of financial companies sell annuities, including insurance companies, banks and investment brokers. After you sign up for an annuity, you begin by making payments to the company, either as a single lump sum deposit or as regular payments over time. The period when you are contributing into your annuity is called the accumulation phase.
In exchange for payments during the accumulation period, the company promises to make regular income payments to you in the future. The period when you start collecting payments from an annuity is called the distribution phase.
You can choose when you want the payments to begin and how long they should last. You could pick a set number of years, like a 10-year payment period, or guaranteed payments for your entire life. Different terms and costs are involved with varying payout periods.
Read Also: How To File For Early Retirement
Lifetime Benefits Rider Explained
An annuity with a lifetime income benefit rider will provide a smaller stream of annual income, Summers said, estimating about $8,000 for the same $200,000 annuity. But the purchase price and any earnings will be in a cash account to which the annuity owner has access.
Any unscheduled withdrawals from the account will reduce the income stream. By the same token, systematic withdrawals that form the income stream will reduce the amount of money in the account. But the remaining funds are still available.
The money in this account will also continue to grow, according to the investment strategy in the annuity contract. If its a variable annuity, the account could lose money. If the annuity owner dies, the remaining funds would go to a beneficiary. In this sense, this kind of annuity is more like an investment than a traditional income annuity, which is an insurance product.
The income rider may also include a guaranteed level of growth. But Summers said consumers should understand those guarantees relate to the dollar value of income payments and do not apply to the amount of growth of the underlying cash account.
Once the income stream depletes the contents of the account, the payments will continue. At this point, this kind of annuity will be considered annuitized, as there is no access to a cash account.
Deferred Annuity Vs Immediate Annuity
Under the annuity definition, there are two kinds of contracts, depending on when you start collecting payments. If your payments begin within a year of your purchase, its called an immediate annuity. If youd like to wait a year or longer to start receiving payments, its called a deferred annuity.
Either way, the annuity company invests your money in the market so it grows over time. The kinds of investments depend on the type of annuity you choose, which we explain below.
Note that there is a specialized deferred annuity called a qualifying longevity annuity contract . You fund a QLAC with a one-time lump sum payment from your IRA accounts or a 401 balance, and opt for period payments guaranteed to last for the remainder of your lifespan, starting between when you turn age 72 and age 85.
The longer you wait for your payout, the bigger the payouts become. You may invest up to 25% of the total balance of your IRAs and 401s, or a maximum of $135,000 .
You May Like: Retirement Homes In Hayward Ca
Your Retirement Benefits Can Be Affected By Early Retirement
Certain federal benefits, such as your health insurance, wont carry over if you take certain types of early retirement. That isnt to say you cant get them back , but you wont be able to for the duration that you arent getting paid your annuity.
Generally, this principle applies to postponed retirement . As previously stated, postponed retirement allows you to put off your annuity payments until a particular time to avoid penalties you might otherwise incur. If you leave federal service early, however, it halts your federal health benefits, among other things.
To elaborate, federal employees can keep their benefits when they retire . However, you arent allowed to do this with a postponed retirement account until your annuity begins to pay out.
Once your payouts begin, you will be allowed to reapply for those benefits, but in the meantime, youll need to find another way to receive health insurance coverage.
This same principle applies to other benefits as well, such as dental, vision, and TSP.
Who Shouldnt Invest In Annuities
Annuities might not be a good choice if you need flexible access to your money. The surrender charge and early withdrawal penalties make it expensive to tap your annuity early. For most retirement savers, the best strategy is to max out your 401k and IRA plans first, and only then consider investing extra money in an annuity. These retirement plans offer more tax benefits and lower fees.
Another problem with annuities is that some of the agents who sell them can earn very large commissions, which means they have a strong motivation to recommend products that may not be the best fit for you. If youre looking at annuities, consider meeting with a fee-based financial advisor who does not earn commissions on annuity sales. They can give you an unbiased opinion on whether annuities are a good fit for your retirement plan.
Also Check: How Much Retirement Should I Have At 35
Your Annuity If You Die
When you buy an annuity you can either nominate a reversionary beneficiary or choose a guaranteed period option.
- Reversionary beneficiary Your nominated beneficiary will get your income payments for the rest of their life. This is usually at a reduced level, for example, 60% of your income stream.
- Guaranteed period A minimum payment period is set when you buy the annuity. If you die, your beneficiary will get your payments, either as a lump sum or income stream. The income payments will not reduce.
Understanding Individual Retirement Annuities
Like other types of annuities, an individual retirement annuity is a contract between an individual and an insurance company. The individual contributes an agreed-upon amount, and the insurer promises to pay the money back, with interest, at some future date, either in the form of a lump sum or as a series of regular payments. Individuals often buy annuities to supplement their other retirement income, such as Social Security.
Individual retirement annuities can take the form of a fixed annuity or a variable annuity. Fixed annuities pay a set rate of interest, while variable annuities base their return on a portfolio of sub-accounts chosen by the annuity owner. These sub-accounts look like mutual funds, follow the same strategies as mutual funds, and have similar names to mutual funds, but are not mutual funds.
During what’s known as the accumulation phase, the money in the annuity account grows tax-deferred.
Don’t Miss: Calculate Your Retirement Savings Goal
What Is An Index Annuity
The amount you earn from an index annuity is determined by the performance of a market index, like the S& P 500. Your annual return is calculated over the course of a specified period, typically one year. When the index gains value, the value of your index annuity increases, but it also loses value when the index declines.
This potential for volatility is the main feature of an indexed annuity. However, your gains and losses are typically capped by the annuity contract. The participation rate limits how much you can gain when the index rises, and stock dividends are usually excluded from your index gain. On the downside, a floor is usually included, which limits your annual loss no matter how far the index declines.
For example, an index annuity contract might say the most you can earn in a good year is 7%no matter how much the underlying index gains in one yearbut during market downturns the annuity company guarantees you would not lose money, so in the worst case you just have a return of 0%.
Fixed Annuities Offer Guaranteed Rates Of Return
The insurance company will invest any money that you put into an annuity. Theres always a certain level of risk involved when you invest money. However, any contract you sign for a fixed annuity should include certain guarantees to prevent you from losing money. Fixed annuities guarantee that you make a certain percentage of your principal investment. That percentage is usually quite low, but it does mean that youll earn more than the amount of your original investment.
Recommended Reading: Madrona Hills Retirement Salem Oregon