Which annuity is right for you?
By now you know annuities can be used to generate an immediate lifetime income stream, or safely grow your money while protecting you from the volatility of the stock market, but the difference between buying the right and wrong annuity can be catastrophic to the outcome of a retirement.
Be it a lack of education or an unethical salesman, thousands of individuals and hundreds of millions of dollars end up in accounts counter productive to the retirement plan they’re meant to serve. We’ll assume you understand the difference between immediate and deferred annuities and their subtypes.
Deciding between an immediate or deferred annuity is the first step; it’s really a matter of timing and whether you’re in the accumulation or distribution phase. Since the accumulation phase is one where you’re saving and Deferring your retirement, it makes the most sense to buy a deferred annuity.
If you’re about to retire, or you are retired, and need income you may want to consider an immediate annuity. An immediate annuity can sometimes, but not always make sense. Here’s why:
Buying an immediate annuity
Buying an immediate annuity is a lifetime decision and commitment; once you buy it, you can’t go back. The benefit is a lifetime income stream, for your life only; when you die, the remainder is left with the insurance company. People who buy immediate annuities do so to maximize their monthly income.
For those without family, or with a family who would not suffer from the loss of income, an immediate annuity could make sense. Those with family can choose to add special options to leave their beneficiaries a lifetime income stream (joint-life annuity for spouse only), a cash refund (difference between their initial investment and their withdraws), or a period certain (a guaranteed payment for a specified number of years starting the day the annuity is purchased).
Of course, these added options will reduce your guaranteed monthly income from the annuity. One last option is to buy the basic annuity and a life insurance policy to pay your beneficiary(res) what they would have received if you chose one of the special options.
Buying a deferred annuity
Majority of people buy deferred annuities because they’re flexible. They can act to preserve capital, or generate an income stream like an immediate annuity. Nearly all deferred annuities include a death benefit. Deferred annuities allow their participants to continue growing their asset while taking income from it, and have the potential to increase the income stream dependent upon the performance of their underlying investment account.
There are several add ons, called riders, available for deferred annuities. The most popular is called an Income Rider. The income rider works by creating a separate account called the Income Base account. Big guarantees are typically attached to the income base account as high as 7.50% annual compound.
This can create significant tax-deferred growth. You’ll receive a 5-6% guaranteed lifetime income stream from the income base account. It’s important to understand that the income base is separate from your initial investment, called the account value. Access to the account value is limited to 10% annually and will decrease your monthly income base.
Other options include join-life, so if you’ve decided a deferred annuity with an income rider is for you, it might make sense to purchase the joint-life option so your spouse will continue receiving your income when you die.
Nearly every deferred annuity includes a death benefit, so cash refund and period certain are not an option. Keep in mind the type of investments options you’ll have when selecting a deferred annuity. You can choose from a fixed, index, or variable investment strategy.
Summing it up
In the end, if you’re looking to start an immediate lifetime stream of income with a high monthly payout, look to an immediate annuity. If you’re looking to deferrer and protect your income until a later date, a deferred annuity is more than likely for you.