Even though saving for retirement is important, living a more worry-free future has a lot to do with the income you generate from a pension, Social Security, personal investments – or all of the above. But because the traditional defined benefit pension plan is going the way of the dinosaurs, retirees must take the reins and be creative with their income planning. For this reason, more people are turning to annuities now so that they have at least one secure source of incoming cash flow.
While this is a viable strategy for many retired individuals and couples, though, choosing the right annuity is the key. Otherwise, you could still find yourself hoping that your money lasts…and when it comes to retirement income, “hope is not a strategy!”
How an Annuity Can Help with a More Secure Retirement
If you and/or your spouse are a participant in an employer-sponsored retirement plan, you may be generating some nice tax advantages. For instance, with a traditional 401(k), your contributions go into the plan pre-tax. This means that you get a break on income taxes that would otherwise be due on the amount of the contribution.
You can also attain the added benefit of tax-deferred growth in the account. Without having to pay taxes on your gains each year, the money can continue to grow and compound without taxation until the time of withdrawal.
Yet, even though these are some enticing benefits, 401(k)’s – as well as 403(b)s, IRAs (Individual Retirement Accounts), and other defined contribution plans – are not income plans. So, in order to generate a regular income stream in retirement, it can take some planning.
One financial vehicle that more people are relying on is the annuity. As an example, if you purchase an immediate annuity, it can be funded with IRA and/or retirement plan funds. It will then start to generate an ongoing stream (either right away or within the next 12 months).
With most immediate annuities, you will typically have the option to choose how long the income will be paid out – which usually includes a lifetime income option that will continue to pay you for the rest of your lifetime.
Some annuities even offer a joint life income option. In this case, income will payout from the annuity until the death of the second recipient. (The dollar amount may either remain the same, or it could be reduced following the death of the first person). This can provide you with security, knowing that income will not run out, regardless of how long it is needed.
So, what if retirement is still several years away?
If you’re not quite ready to retire yet, deferred annuities can provide you with tax-deferred growth, as well as a number of possible added features, too, such as a(n):
- Death benefit
- Penalty-free waiver of funds in case of a terminal illness diagnosis and/or the need to reside in a nursing home for a minimum time period (such as 90+ days)
Other Benefits of Owning an Annuity
In addition to tax-advantaged growth and ongoing income, an annuity could provide you with some other nice benefits, as well. As an example, having a good, solid income stream in place could allow you to retire before you had initially intended.
For instance, if an annuity generates enough income to cover your living expenses, it may be possible to tell your employer good-bye and essentially “replace” your paycheck with income from the annuity.
If this is the case, though, there could be some tax-related consequences. So, it is important that you work through the process of setting up an annuity with a retirement income specialist. That’s exactly what we do at Annuity Gator.
Our income experts can help you to narrow down the annuity (or annuities) that could work for your particular short- and long-term financial objectives. If you would like to learn more about annuities and how they may benefit you, feel free to reach out to us directly at (888) 440-2468, or you can send us an email with any questions that you have. We look forward to meeting you.