A retirement annuity is a type of insurance policy that provides a regular stream of payments to you during retirement. You may already have an annuity through your employer, but there are many other options available.
A retirement annuity is an investment vehicle designed to provide income
If you’re not familiar with retirement annuities, they could be a good way to help you live a stress-free retirement.
Retirement planning is an important part of financial planning. Many people choose to save money for retirement through a combination of employer sponsored retirement plans and personal savings accounts. However, many people are concerned about the security of their future income streams. Retirement annuities provide a guaranteed income stream for life. These annuities are often sold by insurance companies, banks, mutual funds, and other financial institutions.
But an annuity can!
Retirement annuities are a type of fund that operates similarly to a personal pension plan. They are designed to help individuals save for retirement. They are also tax advantaged investments.
A retirement annuity is an investment vehicle that allows you to save for retirement while deferring taxes on any gains. You can invest in stocks, bonds, mutual funds, real estate, or other investments. When you withdraw the money at retirement, you’ll pay taxes on the gains, but not before then. If you don’t need the money for a long time, you can keep growing your nest egg.
How Do Annuities Work?
A traditional annuity is an insurance policy that pays out a fixed amount of money each year for your life. These policies are usually tied to a particular investment portfolio, and pay out a certain percentage of the value of that portfolio every year. Traditional annuities are guaranteed, meaning that if the value of the underlying investments goes down, the company will still pay out the same amount of money each year. However, there are other types of annuities.
An annuity is a contract between you and a life insurance company. You contribute money to the annuity, and the insurance company agrees to pay you a certain amount of money each month for a set number of years. Annuities can be either immediate or deferred. Immediate annuities begin payments immediately after the contract is signed. Deferred annuities begin payments at a later date. Some deferred annuities offer additional features like tax deferral or guaranteed minimum withdrawals.
Death benefits are paid out when an annuity holder dies. If the annuitant dies before all of their premiums have been returned, then the insurance company pays out the remaining amount to a named beneficiary. The beneficiary usually receives either a single payment or a series of payments over time.
Many financial professionals and annuity research experts agree that annuities offer the best way to protect yourself from longevity risk.
Research has also shown that people with a guaranteed, lifetime income are not only happier and less stressed out, but they’re also healthier.
What other type of financial instrument can claim that?
Retirement Annuity Benefits
The biggest advantage of an annuity is the ongoing stream of payments it provides – along with death benefits if the annuitant dies during retirement.
Contributions can be made to the RA through payroll deductions. These contributions can be deducted by your employer if you are employed. However, they are considered taxable income to the RA participant.
If you're planning on retiring early, then you might want to consider using an Annuity Expert
With the disappearance of traditional pensions over time, more people will need to look for alternatives for generating reliable streams of income in retirement. Annuities are one such option.
According to Moshe Milesky, Associate Professor of Financial Services at the Schulich school of business at York University, and the executive director of the IFIS center in Toronto, “Of all the hurdles that individuals face in saving for retirement – perhaps the most challenging is avoiding running out of money before you die.” Milesky goes on to say, “The technology that solves this challenge – the life annuity – has existed for centuries and amazingly, predates ordinary stock and bond investments.” One of the best examples is Social Security retirement income, because for those who qualify for this program, it will continue to pay out an ongoing income stream for the rest of their lives – no matter how long that might be.
Retirement Annuity vs Pension Fund
Retirement annuities and pensions are similar in many ways. Both provide a steady stream of income to retirees, regardless of how long they live. However, there are some key differences between them. Retirement annuities are usually funded by contributions made by the employer and/or employee. Pension plans are funded by contributions made by employers.
As of just a few years back (in 2016), the Retirement Annuity can now qualify for tax-related incentives like pensions. In this case, participants can deduct their contributions into an annuity – up to 25% of taxable income or their gross remuneration – whatever is higher.
Individuals can contribute to multiple retirement accounts at once, but the tax benefits are determined by the total amount contributed to all of them. For example, if you contribute $5,000 to your 401(k) and another $10,000 to your IRA, then you will get a $15,000 tax benefit. If you were to contribute $20,000 to both accounts, then you would get a $30,000 tax benefit.
Another similarity between retirement annuities (RAs) and pensions is that both allow employers to contribute money to the plan on behalf of the employee. However, unlike pensions, RAs allow the employer to deduct the contribution from the employee’s paycheck before taxes are taken out. This means that the employer does not pay any tax on the contribution.
An RA participant can only retire once they reach the age of 55. However, there is one exception to this rule. If the participant is in poor health, they can retire at any time before reaching the age of 55.
Retirement annuities differ from pensions because annuities are personal retirement savings vehicles whereas pensions are handled by an employer.
An individual may have a bit of extra flexibility when participating in a Retirement Annuity. For example, a participant can be paid up, meaning that the participant no longer needs to make monthly contributions, but they still need to remain invested until they reach age 55 or older.
Once you retire, you can choose to receive your retirement annuity as a single payment or as a series of payments. You can also choose to receive a portion of your retirement annuity as an immediate lump sum. If you choose to receive your retirement as a series of payments, you will need to pay taxes on those payments.
If you invest in more than one retirement account, the one-third rule applies to all of your accounts combined. If you have multiple retirement accounts, the one-third limit will apply to each individual account separately.
Traditional pension funds may continue paying benefits to a spouse upon a plan participant’s death, but in the case of retirement accounts, the account holder’s beneficiary will receive the account balance at the time of the account holder’s death.
In this example, the trustee must consider all of the deceased participants’ dependents. To ensure that all such participants will be included in this consideration, the plan participant should list all of his or her dependents on a beneficiary designation form.
If this is not completed, or if the RA participant does not have any financial dependents, then the funds from the Retirement Annuity will instead go into the estate and will then be distributed according to the RA participant’s will.
With regard to the tax treatment of these benefits, any payments made to participants upon their death will be treated as if they had been paid out prior to their death.
Understand your retirement annuity contract
Retirement annuities are an important part of any financial plan. They provide a steady stream of income throughout retirement, and can help protect against inflation. However, there are many different types of annuities available, and choosing the right one for you can be tricky. You need to understand what each type of annuity offers, and how they differ from one another.
There are two main types of retirement annuities. Traditional annuities are offered by larger insurance companies, while newer generation annuities are offered through asset management companies.
With the latter, it is not required that participants enter into any kind of contract. Instead, they simply deposit money into an account that is managed by the platform. When they need to withdraw funds, they send a request to the platform, which then sends them the amount requested. There are no fees associated with withdrawing funds, nor are there any penalties for withdrawing before the end of the term.
Depending on the type of annuity, there may be additional fees associated with the annuity. For example, if an individual enters into a deferred variable annuity, he or she will incur surrender charges if he or she decides to transfer the annuity to another company. These fees can be as high as 30% of the initial investment amount.
The second kind of retirement plan is called an Individual Retirement Account (IRA). These are similar to 401(k)s, except that you own your own money instead of having it owned by your employer. You can contribute to them yourself, and you can also withdraw funds from them at any time. However, unlike 401(k)s that allow you to borrow against your future earnings, IRAs do not allow borrowing.
Because the newer generation annuities don’t need to be purchased through a financial advisor, the costs can be significantly lower than if they were purchased through a broker.
If you’re researching annuities or need help understanding an annuity contract, feel free to reach out to us and we’ll do our best to point you in the right direction.
Who Should Consider A Retirement Annuity?
While retirement annuities can certainly offer some nice benefits, these financial vehicles are not right for everyone. So, should you consider one?
The answer is, it depends.
But a retirement annuity could be a good option for you if you are:
- Self-employed
- Not a participant in an employer-sponsored pension plan
- Want to supplement your pension or other retirement income stream(s)
- Currently earning a large amount of “non-pensionable” income (such as rental income and/or interest)
How to Ensure Income with a Retirement Annuity Plan
Over time, as the responsibility of ensuring retirement income has shifted from employers and governments to individuals, investors will need to be mindful of their options – particularly in light of longevity and keeping income flowing for an indefinite amount of time.
Knowing what a retirement annuity is can help individuals to ensure that income will continue to flow in – even if they are not a participant in an employer-sponsored plan. But retirement annuities come with a fair amount of fine print. So, it is essential to understand the do’s and don’ts before you lock into a long-term financial commitment.
At Sooner Retirement, our focus is on making sure that consumers are educated about annuities and retirement income strategies. Our team of annuity specialists can help to walk you through the options that are right for you, depending on your specific short and long-term financial objectives.
If you’d like more information regarding which way to turn when setting up your retirement income strategy, we’d be happy to help. You can reach out to us directly via phone at (918) 938-7734, or you can click here and set up a convenient time to chat with an annuity expert.
Knowing how annuities work, and what you can expect when you purchase one, can eliminate a whole host of worries and surprises in retirement. So, contact Sooner Retirement today. We look forward to talking with you.
