Annuities for Retirement
Annuities are one of the oldest retirement savings instruments in existence and they are still one of the best. In the 19th century and the early 20th century, such plans were the only source of secure income available for many retirees. Today such instruments provide a number of advantages for persons in need of a secure source of retirement income.
What is an Annuity?
An annuity is a contract between an individual and an insurance company. Under the terms of the contract the company agrees to pay a beneficiary called an annuitant sums of money at specified times. A common arrangement would be a monthly payment of several hundred dollars. In exchange for this the purchaser pays the insurer a large amount of money.
The advantage to this arrangement is that the insurance company is obligated to make the payments as long as the contract is in effect. The only way the payments cannot be made is if the insurance company goes out of business. That is why experts will advice persons to buy policies from highly rated insurance companies.
Most states provide a further layer of protection by insuring annuities up to $100,000 or more. This means that the funds placed in them are very secure and safe.
Types of Annuities for Retirement
There are several kinds of annuity that are used for retirement. The most popular policy is a deferred annuity. This is a plan purchased by regular payments to an insurer over a period of years. The purchaser pays into the policy until they retire, at which point he starts getting a regular payment from it.
A traditional or immediate annuity starts paying out immediately. Many people with large amounts of cash on hand purchase these plans which are also called SPIAs when they retire. The reason people buy such policies is that they are insured and the funds in one are tax deferred. That means no income taxes is due until the money is paid out.
Like a bank account this kind of investment does earn interest. A fixed rate annuity earns interest at the same rate much like a bank account does. A variable annuity has interest rates that change. An indexed annuity is a plan that is partially invested in an index of stocks in order to provide a higher rate of return. A split annuity is a plan that lets you make contributions after you start receiving income from it.
How to Use Annuities for Retirement
Most people use these vehicles to augment other sources of income such as pensions and Social Security. A person who has a regular pension might use the proceeds from the sell of a house or investments to buy a SPIA in order provide another source of retirement income.
Somebody who has maxed out her IRA or 401K could use a deferred annuity to save up more for retirement. Unlike IRAs and 401Ks there are no limits on the amount of income you can add to an IRA. An annuity is one of the few tax deferred investments that a person over 70 can contribute to. For example, a person who receives a good pension and owns a rental home might put the rental income in annuities to increase future income.
The security and flexibility provided by this kind of investment, makes it one of the best alternatives for retirement income and security. Everybody should look into the possibility of purchasing one.
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Steven Hart is a freelance writer and a Financial Advisor from Cary, IL. He writes about finance topics like annuities, insurance, investment, and retirement.
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