Retirement should be a time of happiness and financial confidence, not a guessing game. Yet, many retirees find themselves wondering whether their savings will last. Market volatility and longevity risk can turn what should be your golden years into years of uncertainty. So, how can you guarantee that you won’t run out of money in retirement?
This is where annuities come into play. Annuities, which can be purchased from life insurance companies provide a steady, guaranteed income stream that can last a lifetime. Unlike market-based investments which comes with ups and downs, annuities offer “for sure” income to give you peace of mind.
Before making a decision, it’s essential to understand how annuities work and whether they fit your financial strategy. Here are 5 key things to consider before purchasing an annuity:
1. Types of Annuities: Which One is Right for You?
There are three main types of annuities:
- Fixed Annuities – Offer a guaranteed rate of return and predictable payments.
- Variable Annuities – Allow you to invest in market-based options, meaning returns (and losses) fluctuate.
- Indexed Annuities – A hybrid option that ties returns to a market index, with a guaranteed minimum return.
Each type serves different financial goals, and understanding which one suits you best can make all the difference in your retirement planning.
2. Payment Options: How Will You Receive Your Money?
Annuities offer flexibility in how you receive payouts. You can choose:
- A period certain annuity, which provides income for a set number of years.
- A life annuity, which guarantees payments for as long as you live.
- A joint-life annuity, which continues to provide income for both you and your spouse.
This flexibility allows you to tailor your annuity to your retirement income needs.
3. Understanding Fees: What Costs Are Involved?
While annuities provide valuable benefits, they also come with costs. Some fees to be aware of include:
- Mortality and expense risk charges
- Administrative fees
- Investment fund expenses (for variable annuities)
- Surrender charges for early withdrawals
Knowing these costs upfront can help you make an informed decision and maximize the value of your investment.
4. Tax Advantages: How Do Annuities Impact Your Taxes?
Annuities grow tax-deferred, meaning you won’t pay taxes on earnings until you withdraw. However, when you do take withdrawals, gains are taxed as ordinary income. Additionally, withdrawing before age 59½ may result in a 10% IRS penalty. A financial professional can help you navigate these tax implications to optimize your retirement strategy.
5. Are Annuities Right for You?
Annuities aren’t for everyone. While they provide a stable income stream, they may not be suitable if you need short-term liquidity or prefer higher-risk investments. The best way to determine if an annuity fits into your overall retirement plan is to discuss your goals, risk tolerance, and financial needs with an expert.
Let’s Talk About Your Retirement Strategy
Annuities can be a powerful tool in securing your financial future, but they must be tailored to your unique situation. If you’re wondering whether an annuity makes sense for you, let’s have a conversation. I specialize in helping individuals and families create tax-efficient retirement income strategies that provide peace of mind.
Don’t leave your retirement income to chance! Schedule your no cost consultation with Brightside Financial today to explore how annuities can secure your financial future.
