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Is a Retirement Annuity the Answer for your Retirement Savings?

Retirement Annuity

You’ve probably heard that investment plans and financial schemes like, IRAs and 401 (k), are the best ways to plan for retirement. This might be true in most cases, but not always. For instance if you have invested your maximum contribution for the year to your retirement account and you’re seeking to add a bit more more. What can you do? In this case, among others, investing in a retirement annuity might be the Estate Planning solution you are looking for.

Understanding the Concept

Annuities are usually a “tax-deferred” investment. The idea is simple, all you need to do is invest a cash lump sum or make monthly installment payments to the annuity issuer (usually an insurance company) in return they will give a payment to you (or your beneficiary) usually after your retirement. The period of funding the investment is referred to as the accumulation stage and the period of receiving the payments is refererd to as the distribution phase.

The Advantages of Investing through an Annuity

Although the initial investment is after taxes, the earnings that are accumulated in your annuity are tax-deferred until you withdraw the amount from your account. This means that they can grow faster because a portion of the gain isn’t being sent to the taxman every year.  This provides a larger lump of funds for the post retirement period (distribution phase). You will not need to pay taxes on the entire distribution only on the part that is determined to be a “gain”.  Another advantage is that an annuity can be structured to provide a lifetime income that cannot be outlived. When you begin the distribution phase, you can choose from a lump sum or lifetime distribution. If you choose a lifetime distribution the annuity company will estimate your life expectancy and set up a payment schedule. This fixed dollar payment will continue for the rest of your life no matter how long you live.

Is Investing in an Annuity Safe?

Retirement Annuity ContractWorried about the safety of the investment? Well, investing in an annuity is considered one of the lowest risk investments because it is a contract. For instance, in the case of annuity schemes with a fixed rate of interest, the assets of the provider of the scheme usually guarantee the values. In other words, annuity holders come before shareholders of the Insurance company. And as insurance companies, they are highly regulated by the Department of Insurance issues for each particular state.

Assets that can be Contributed to Your Retirement Annuity

Often you can contribute, a variety of asset types to the annuity, from checking and savings accounts, mutual funds, Maturing CDs, stock and bond funds, money market funds, Treasury bonds, and even IRA rollovers.

Is an Annuity a Good Investment Option for Everyone?

The answer is a definite ‘no’. Since, this is a financial agreement or a contract, the needs and interest tend to vary with individuals. While, you might be happy investing with an annuity; your friend might find some other beneficial plan better meets his needs. Individuals needing to meet short-term financial needs should never invest in an annuity plan. However, if saving for retirement is your goal, a retirement annuity can do the trick for you. Furthermore, if you are seeking a locked in guaranteed income after retirement, investing with an annuity should be your first choice. Also, individuals wanting to accumulate funds tax-free should also look into deferred annuities.

A retirement annuity provides payments for life but there are a variety of different ways to accumulate your nest egg before the distribution phase begins. If you annuitize the agreement and select a lifetime income choice, you are guaranteed a stream of income that cannot be outlived. Usually, the income is guaranteed by the assets of the insurance company. However, this guarantee is not always applicable to the investment performance of variable annuities. In other words, you need to look carefully at how the accumulation phase works. In variable annuities the growth of your investment might be based on the performance of the stock market or some other index. While in a fixed annuity it might be a guaranteed interest rate. Which type of accumulation you choose is up to you based on the amount of time you have to accumulate your nest egg and your Investing risk tolerance. But be sure to look at a variety of different options before signing on the dotted line. Once you commit to an annuity there are often stiff withdrawal penalties if you change your mind.

A retirement annuity, if invested in the right plan with the right issuer can provide you with great financial benefits, providing a good permanent retirement income.

For more information see: Investing for Retirement

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