In fact, annuities are not investments, although people often think of them that way. They are insurance products that can guarantee you will never outlive your retirement savings, and they can be good savings tools. In this article, you’ll learn about the primary benefits of annuities and some things to consider when you are purchasing one.
Annuities are insurance products that can eliminate the risk you’ll outlive your retirement savings. Today, since fewer people are covered by traditional pensions, annuities have become increasingly popular. They can often be combined with other insurance products, like life insurance, to create complete protection for you and your family.
It’s common today for those approaching retirement to be concerned about their savings and how long they will last. With the right annuity in place, you will never have to worry about outliving your savings. There will always be income for as long as you live. That gives many people valuable peace of mind.
You make a premium payment to an insurance company, either in a lump sum or as a series of payments. In return, you’ll get regular income for a specified period, often for life. There are different types of annuities for different types of retirement goals. Some annuities help you grow and protect your savings before you retire, ensuring that your nest egg will be there for you when you’re ready to start using your savings to pay for your retirement. Other types of annuities allow you to convert a portion of your savings to an immediate lifetime income stream, which will be paid to you on a regular basis no matter how long you live.
While they aren’t technically investments (as stocks, for example, are), annuities can be a good savings tool for many people. We’re living longer, and future expenses are unpredictable, so retirement has become a big question mark in people’s lives. If you’re concerned about your retirement savings lasting, annuities might be a good idea.
Every type of retirement savings vehicle has pros and cons. Annuities are no different. Take a look at some of the primary benefits of annuities compared with other retirement savings vehicles:
Annuities are the only financial product that can provide you with guaranteed lifetime income and ensure that you are never at risk of outliving your savings. You can choose other types of disbursements, but lifetime income is most commonly chosen.
As is the case with many retirement savings vehicles, any earnings on your deferred annuity are tax-deferred. That means you don’t pay taxes on the growth in your account until you withdraw it or begin taking payouts. In other words, the taxes you’d normally owe on the gains each year remain in your account and grow, often leaving you with higher balances down the road. You can also purchase an annuity within a tax-advantaged retirement plan (like an IRA, TSA, or SEP), but it’s important to note that tax qualified retirement plans already provide tax deferral under the Internal Revenue Code, so the tax deferral of an annuity does not provide any additional benefits. Thus, an annuity should only be purchased in an IRA or qualified plan if the client values other features of the annuity and is willing to incur the additional costs associated with the annuity to receive such benefits.
Both 401(k)s and IRAs have limits on how much you can contribute each year. If you’re already nearing retirement, those limits may prevent you from making the most of your savings. Deferred annuities have no limits. You can pay as much as you want, either in a lump sum or in a series of payments over time within your annuity contract’s limits.
Since annuities are insurance products, you have a lot of options, and most can be customized through optional add-ons called riders to provide added benefits. As part of a well-rounded retirement plan, annuities can provide some protection for you and your family. That could include a death benefit (provided you didn’t start your income), a survivorship clause, or being able to pass the annuity on to heirs. This makes them more flexible than many retirement savings vehicles.
Be careful when shopping around. There can be surrender charges and/or tax penalties if you access your funds early. Because the guarantees associated with annuities are based on the claims-paying ability of the issuing company, you should be mindful of the financial strength of the company and choose one that is built for the long term, like New York Life.1 To find the best product for you, you’ll need to shop around among trusted insurance providers.
One of the benefits of annuities is that they are highly customizable. The right annuity for you is going to depend on many factors, including your age, your current savings, how long you need the income, and any protections you might want. The best way to approach an annuity is to shop around and consult your financial services professional.2 Below are a couple of common examples:
You and your spouse are planning to retire within the next few years. You’ve both saved a good amount but are now trying to crunch the numbers and make sure your savings will last. It’s common to fret over how much of your savings to access every year, or how long your savings will need to last. One step you could take is to convert some of your existing 401(k) or IRA savings into an immediate annuity and add your spouse as a joint owner.3 That way, you and your spouse will have income you can count on no matter what happens.
On the other hand, let’s say that you’re in your late 20s. You’ve recently had a nice raise at work, and you want to make sure you’re doing everything you can to guarantee a comfortable retirement. You may already be contributing to your employer’s 401(k) plan. That’s a great start. But retirement is a long way off, and who knows how much those savings will grow or if there will be enough when you reach retirement age. A variable deferred annuity might be something to add to your retirement plan. Some annuities allow you to make premium payments every year. With a variable annuity, your premium payment will be invested in an option of your choice. The annuity will have the opportunity to experience growth, but it will also be subject to market volatility.
New York Life has many options for annuities, and we can help you customize them to your family’s unique needs. We’re here to help. We can walk you through all of your options, with no pressure to buy. Get started today by.
1New York Life has received the highest financial strength ratings currently awarded to any U.S. life insurer by Standard & Poor’s (AA+); A.M. Best (A++); Moody’s (Aaa); and Fitch (AAA). Source: Individual Third-Party Ratings Reports as of 10/18/22.
2401(k) rollover services and variable annuities are offered by the properly licensed registered representatives of NYLIFE Securities LLC (Member FINRA/SIPC), a Licensed Insurance Agency and a New York Life Company.
3When considering rolling over the proceeds of your retirement plan to another tax-qualified option, such as an IRA, an immediate annuity, or a deferred annuity, please note that you may have the option of leaving the funds in your existing plan or transferring them into a new employer’s plan. You may wish to consult with your new employer, if any, to learn more about the options available to you under your plan and any applicable fees and expenses. You may owe taxes if you withdraw funds from the plan (rather than doing a direct rollover). Please consult a tax advisor before withdrawing funds.