Annuity basics: how to retire with a guaranteed paycheck for life
Nov 30, 2021, 5:48 PM | Updated: Dec 2, 2021, 1:28 am
Does the thought of retirement fill you with stress or with happiness? Everyone wants to spend their retirement in a way that brings them the most joy, whether that’s traveling the world or spending extra time at home with grandkids. When you’re planning your retirement, you should have all the tools at your disposal to make sure you’re able to retire stress-free.
Annuities are a one-of-a-kind retirement savings tool that can help supplement other forms of retirement income and provide you with peace of mind in retirement. In fact, it’s the only financial instrument that can guarantee you a paycheck for the rest of your life! Think of an annuity as a pension you fund yourself.
What exactly is an annuity?
An annuity is contract issued by an insurance company. You fund an annuity with a premium (either one single premium or multiple premiums over time) and when you decide you’re ready, you turn the contract into a stream of income payments. These payments can last for the rest of your life or, you can have a joint payout that provides income for the rest of your life and your spouse’s life! Having that guarantee can help when you aren’t getting a regular paycheck from an employer anymore.
There are several different types of annuities but the easiest way to start is to decide whether you’re ready to receive income now or later. If you’re in or near retirement, you can purchase an immediate annuity. As the name suggests, an immediate annuity begins payouts almost immediately after you purchase.
If you have a little time before you retire, you can select a deferred annuity. A deferred annuity lets you accumulate earnings for a period of time, and then when you’re ready, you can begin receiving income payments.
You will also need to decide how much risk you want to take with your annuity. A variable annuity is the riskiest type, tying gains and losses to market gains and losses (meaning you can lose money).
A fixed indexed annuity allows you to participate in market gains without having to worry about market losses (although with this type you may earn 0% in a given year).
The simplest type of annuity is a fixed annuity. This annuity has all the benefits of the other two types (tax deferral and a guaranteed income for life) but the interest rate is fixed so you will not experience market losses or have a year where you aren’t credited any interest. Knowing exactly how much money you will accumulate can make planning for retirement much easier.
The benefits of an annuity?
Although lifetime income is an exciting benefit, it’s not the only benefit of an annuity. Annuities also offer the benefit of tax deferral. Tax deferral means you don’t pay taxes on the interest you earn right away. That’s exciting because the money you would have paid to the government in taxes each year is still working for you, earning interest until you decide to make a withdrawal. And since most people are in retirement (and usually a lower tax bracket) when they begin taking withdrawals, they end up paying less tax overall on the same money.
How old do I need to be to get an annuity?
The simple answer is any time is a good time to start.
On average, annuities are purchased between the ages of 40-70, but even a 20-year old can start saving for retirement with an annuity.
There is no federal age limit, although some companies may have their own policies.
The longer you can let your money grow before turning it into a steady retirement income, the more money you can expect to receive during the payout phase.
It’s important to remember that annuities are intended to be used as long-term retirement savings vehicles. Just like with withdrawals from an IRA or 401(k), the IRS imposes a 10% penalty on annuity withdrawals before age 59.5. And insurance companies may also impose surrender charges on excess withdrawals taken during the first few years of an annuity contract. Make sure you have an appropriate amount of money set aside for emergencies before funding an annuity.
How to pick the right annuity?
Thinking about and saving for retirement doesn’t have to be stressful. An annuity can help ease any worries about outliving your money with a guaranteed paycheck for the rest of your life.
First, think through when you want to start receiving income (now or later). Next, decide what level of risk feels right for you. .
From there, find a company that provides the type of annuity you’re looking for. It’s important to make sure the insurance company has a strong financial history and great reviews from customers (make sure they use a verified review site like TrustPilot).
If you have decided that a deferred, fixed annuity is right for you, visit the Canvas Annuity website. Canvas allows you to apply for and fund an annuity completely online.