Planning for retirement can be challenging. It is difficult to plan for retirement income unless you’re willing to risk taking too much of your principal when the market is down. This is why alternatives like annuities were created. Let’s learn how to plan your retirement with annuity plans.
Think About Your Time Frame
How long do you plan to spend in retirement? When do you want to receive your first payment? The money will grow in the annuity the longer you wait to collect it. This is why you would be better off having an emergency fund while letting the money grow than trying to withdraw money from the annuity when you need the money. This is why you might want to put part of the cashed-out pension you received in savings while investing the rest in an annuity.
If you can let the money grow, then you can choose a deferred annuity. The longer you wait, the more you’ll be able to collect in retirement. Note that you can buy an annuity at any time in your life, and you can contribute a lot of money to it. This allows the nest egg to grow until you’re ready to start receiving payments. The money grows tax-free. There are also no limits on what you can contribute to an annuity, while there are limits on various tax-advantaged retirement accounts. If you need the initial payments to start immediately, then you’d use an immediate annuity. This is the ideal option for those who have a cash nest egg but are afraid to lose it if it just sits in a bank account.
Consider Those You May Leave Behind
Are you married? You can get a joint annuity with the return of purchase price. When you die, the annuity payments are then sent to your surviving spouse. This ensures that your spouse isn’t left without an income when you die. When both spouses die, the purchase price amount is paid to the heirs. This type of annuity has lower returns, but it offers greater financial security.
A life annuity with return of purchase price returns the principal sum to your spouse or heirs. They can invest the money. Depending on the annuity, they could even ask for the principal to be paid in regular installments.
Choose an Annuity
An annuity is essentially an insurance policy, though there are versions that are both insurance policies and investments. The traditional annuity contract has you pay money into the annuity. When you activate the annuity, they begin making monthly, quarterly or annual payments to you according to the contract. These payments were traditionally made in an annual lump sum. That gave rise to the name annuity regardless of when you’re paid.
More recently, the annuity industry was given permission to invest part or all of the client’s money in investments to increase the rate of return on the principal. These annuities can only be sold by someone with a securities license as well as an insurance license. If you want to learn how annuities work, you can find out more here.