Retirement Annuity Guide

One of the biggest fears that baby boomers are facing right now is potentially outliving their money. This is why annuities are one of the best choices for late life retirement funding. They provide a guaranteed return on your investment over the long term. Annuities can be used as a secondary source of fixed income to supplement social security as well. This is extremely important because if you started taking social security today at the age of 62, you'd get $1,992 which isn't enough to eclipse the federal poverty line. If this scares you, it should.

Now imagine that you are living on this miniscule retirement amount. As you age, you'll start seeing your health deteriorate and will expect Medicare to pick up the bills. Unfortunately, more than 70% of retirees will have costs denied by Medicare. These costs can hit upwards of $220,000 according to one industry leader. The undeniable fact is that you will not be able to continue your current lifestyle on Medicare and Social Security income alone.

An immediate fixed annuity can give you the stability that you are looking for and the ability to do more than merely exist, but really live and enjoy your golden years. You may also opt for the advantages of a variable annuity with a guaranteed lifetime withdrawal benefit (GLWB). Both of these options will generally provide you with a reliable source of income that is nearly impossible to outlive.

Which plan is the best for you? That depends on two things - the amount of investment income you have and the amount of risk you are willing to incur on your retirement income.

Immediate Fixed Annuities

An immediate fixed annuity guarantees to pay fixed income payments that last for a specified period. Most fixed annuities will pay over 20, 30 or 40 years. You will always receive the same payment and there is no liquidity in the system. Once you have paid the initial lump sum to the insurer, it is no longer available without significant early termination fees.

This is a very inflexible approach that turns over all control of investing decisions to the insurer. There are however, significant advantages to choosing an immediate fixed annuity in the form of higher payouts at the beginning of the plan.

If you are one of the 40% of baby boomers who have accumulated over $100,000 in retirement savings, this is the right plan for you.

Variable Annuities with GLWB

In a variable annuity with a GLWB, the insurer will protect your investment and guarantee a minimum annual withdrawal limit. You will always have a fixed annual income, although monthly payments may vary. Unlike an immediate fixed annuity, you will have the ability to choose from a number of different funds. You may also choose to continue funding your variable annuity to catch market growth through your investments.

A variable annuity will give you guaranteed withdrawals but the final payout can be lower than that of an immediate annuity. Although, if the market and fund choices you've made increase in value, there is the potential for a variable annuity to outperform a traditional fund.

If you are in the majority of soon to be retirees with retirement savings between $10,000 and $25,000, this type of investment makes the most sense for you. Keep in mind that both retirement annuity plans may be subject to ordinary income tax and, if taken prior to age 59 and a half, may be subject to a 10% IRS penalty.

In Summary

  • Immediate Fixed Annuities offer fixed payments for a certain timeframe. Payment amounts remain the same, regardless of how the market is performing.
  • Fixed Annuities come along with large termination fees after the initial lump-sum payment.
  • Variable Annuities guarantee a fixed annual withdrawal limit, but month payments may vary based on market fluctuation.
  • Variable Annuities offer a larger variety of investment options.
  • As with all retirement plans, early withdrawal will come along with steep penalties.

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