Annuities come in many varieties, each with its pros and cons. But if you want to convert a portion of your savings into reliable lifetime retirement income, your best option is an immediate annuity.
The way this type of annuity works is pretty straightforward. You hand over a lump sum to an insurer who in turn guarantees you monthly income for as long as you live. If you want to assure that the checks will keep coming as long as either you or your spouse is alive, you can do so by choosing a “joint-and-survivor” option.
Immediate annuities offer the same payment options as an annuitized deferred annuity. However, immediate annuities differ from deferred annuities in a few ways. While you can make a single payment or many separate payments for most deferred annuities, immediate annuities are usually funded with a single, lump-sum payment. Immediate annuities do not have an accumulation phase; rather, payments begin within one year from your investment in the annuity. And, unlike deferred annuities, most immediate annuities do not allow for partial withdrawals, although there are some exceptions.
Immediate annuities pay a steady income for a fixed period of time, or for the rest of your life, or for the joint lives of you and another. Often, if you have an immediate need for income, you may be able to buy an immediate annuity.
annuities may include a death benefit that will pay your beneficiary a specified minimum amount, such as your total purchase payments.
Another advantage of an annuity is that you can choose to receive payments from the annuity for your entire lifetime. Even if you live to the age of 100 or beyond, you will continue receiving payments.
There is no limit on how much you can invest in an annuity. In addition, most annuities have options available through riders, usually for a fee or charge, that add benefits to the basic annuity contract, such as an enhanced death benefit, guaranteed income without annuitization, and penalty-free access to annuity proceeds due to a terminal illness or disability affecting the annuity owner.
There is no age limit at which you must begin receiving payments or taking withdrawals. If you do not need the money from the annuity, you can continue to have the earnings accrue tax deferred.
If you die before the distribution period begins, the annuity proceeds will go directly to the beneficiary (or beneficiaries) you have named in the contract, bypassing probate.
Fixed Indexed Annuity
Annuities are retirement investments vehicles managed by life insurance companies. Money contributed into fixed annuities will grow without income tax liability until it is withdrawn.
Fixed annuities earn a stated interest rate, determined by the sponsoring insurance company. That rate is the minimum annual percentage your account will earn, regardless of how the stock market performs or how Wall Street reacts to the latest trends. So fixed annuities essentially carry no risk, as you will never lose money in your account, provided of course that the insurance company remains viable.
Several additional benefits come with owning a fixed annuity, benefits unavailable with other account types. These extra features are powerful motivators for investors, as the comprehensive nature of the product often alleviates other concerns that commonly arise when approaching or entering retirement.
A specialized death benefit is the most common feature associated with fixed annuities that is not available through a portfolio of dividend stocks. Because fixed annuities are offered by insurance companies, they typically contain death benefit provisions that may result in the account owner’s heirs receiving more money than what was in the account at the time of death. A stock account, on the other hand, will generate nothing more than than the total value of the portfolio’s securities.
The biggest downside to fixed annuities is the surrender charge. In exchange for the features, benefits and guarantees offered by the insurance company, annuity contracts contain provisions that allow the insurer to deduct a surrender charge if the account is closed or transferred too soon. Surrender charges vary with each contract and insurance company, and can sometimes be as high as 10%. However, such penalties decrease incrementally over time until finally disappearing altogether.
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