Are you considering an annuity as part of your retirement income strategy? You’re not alone. According to LIMRA, a financial industry research organization, more people are using annuities to help achieve their financial goals. LIMRA estimates that annuity sales will top $230 billion in 2018, far above expectations and an increase from sales levels in recent years.1
A study from the Employee Benefit Research Institute (EBRI) found that 80 percent of surveyed participants in defined contribution plans said they were interested in moving their retirement plan assets into a financial tool that generates lifetime income, like an annuity.2
Why are annuities growing in popularity? And why might one be a good fit with your retirement income strategy? There are a variety of annuities, each designed to meet different needs and goals. Below are a few common benefits that annuities provide:
Many people become more conservative as they approach and enter retirement. After all, you’ve worked hard to accumulate your savings. The last thing you want is for your assets to be depleted by market volatility.
At the same time, you likely know that you still need growth even after you retire. You could be retired for several decades. Inflation will likely drive up your living expenses over that period of time. You could face increased costs for medical treatment and long-term care in the later years of retirement. You will need to continue expanding your assets to fund those needs.
Annuities offer growth potential with limited downside risk. For example, you could use a deferred fixed annuity to earn predictable interest over a set period of time. There’s no market exposure, so there’s no risk of downside loss.
A fixed indexed annuity could offer even greater growth potential. You earn interest each year, but the interest is tied to the performance of a market index. If the index performs well, you earn more interest. If it performs poorly, you may earn less interest, but you won’t lose money. Your premium is guaranteed*, so there’s no risk of loss. These types of annuity products could provide some certainty and predictability for your retirement income strategy.
Guaranteed* Lifetime Income
Annuities are also often used to generate income that’s guaranteed* for life, regardless of market performance. Guaranteed* income can be a powerful force in retirement. You’ll likely have guaranteed* income from Social Security and possibly a pension, but your distributions from your savings may not be guaranteed*. You may be worried about running out of income too early in retirement.
A single premium immediate annuity (SPIA) allows you to convert a portion of your savings into a guaranteed*, predictable income stream. You contribute a lump-sum premium amount. The insurance company then converts that premium into an income stream based on your age and other factors. Generally, the older you are, the higher the income amount. The income is guaranteed* for life, no matter how long you live or what happens in the financial markets.
You could also choose to add a guaranteed* income benefit onto a fixed indexed annuity. You can still earn interest as described above. You can also withdraw a certain percentage of your contract each year. Assuming you stay within the withdrawal limits, the income is guaranteed* for life, even if your annuity doesn’t perform well.
Annuities are tax-deferred, much like 401(k) plans and IRAs. As long as the money stays inside the annuity contract, you don’t pay taxes on the growth. That allows your funds to compound more quickly than they might in a similar taxable investment.
Taxes can be a difficult challenge for many retirees. If you don’t budget carefully, you could face a sizable tax bill that you have to pay out of pocket. Fortunately, an annuity can help you limit your exposure and possibly reduce your tax liability.
Ready to see if an annuity makes sense for your strategy? Let’s talk about it. Contact us today at Protecting Your Retirement. We can help you analyze your needs and goals and determine if an annuity is right for you. Let’s connect soon and start the conversation.
*Guarantees, including optional benefits, are backed by the claims-paying ability of the issuer, and may contain limitations, including surrender charges, which may affect policy values.
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