MEDFORD, OR – 10/07/2023 - If you’re concerned about running out of money in your golden years, act now to secure your financial future so you won’t run out no matter how long you live, even if you pass the 100 mark.
“Qualified retirement plans, including traditional and Roth IRAs, 401(k)s and similar plans, are one cornerstone to assure your retirement. Annuities are another foundation,” says Ken Nuss, CEO of AnnuityAdvantage, an online annuity marketplace.
Annuities Can Build Savings Through Tax Deferral
Deferred annuities build cash value and let your retirement nest egg grow faster through tax deferral.
Fixed-rate annuities act much like bank certificates of deposit but add tax deferral and pay a set rate for a certain term. Interest rates currently are as high as 5.55%. Here’s a table of the best fixed annuity rates by term.
Fixed-indexed annuities offer a fluctuating interest rate, determined by a crediting formula applied to an investment-market index but also guarantee your principal. Investment-oriented variable annuities offer tax deferral but not guaranteed principal and sometimes have high fees.
“When you are retired, you can receive income and, if necessary, principal from your annuities. Any interest income (but not principal) you receive will be fully taxable, but in retirement, you may be in a lower tax bracket. Even if you’re not, you’ll still come out ahead because you have deferred paying income taxes for years,” Nuss says.
Income Annuities Offer a Personalized Private Pension
Income annuities, also issued by life insurance companies, are quite different. They have no cash surrender value normally. Instead, you’re securing a guaranteed stream of income. You can buy an income annuity with a single cash premium deposit. If you already own a deferred annuity, you may convert it to an income annuity through a process called annuitization, or exchange it tax-free for an income annuity with a different company. You can even use IRA funds to purchase an income annuity.
“With a lifetime income annuity, you can create your own custom pension,” Nuss says.
You can convert your savings into a monthly income that’s guaranteed for life. Economists agree that annuitizing a significant portion of your retirement savings is a smart strategy, according to a study from Wharton Financial Institutions Center.
You can self-insure against longevity risk by investing in stocks, bonds, and savings (including fixed annuities.) But you’d need to save 25 percent to 40 percent more than with a lifetime income annuity because you won’t have the advantage of risk-pooling, the Wharton study concluded.
If you’ll need income soon, you can buy an immediate annuity, with income payments beginning within about a month if you like. Because a portion of the income is taxable, you may want to wait until you’re about to enter retirement or semi-retirement before receiving them.
If your need isn’t immediate, you can choose a deferred income annuity and start receiving income at a future date you choose. This lets your money compound longer.
“While inflation is bad news, higher interest rates have a benefit. Because of them, annuities now pay more,” Nuss says.
Cover Long-Term-Care With an LTC Annuity
Long-term care costs a lot. To protect their finances and leave something for their heirs, many people would like to buy long-term-care insurance (LTCI).
But LTCI isn’t cheap. And there’s a big drawback. If you buy it and never collect any benefits, you’ll have spent a big sum of money and not gotten anything in return except peace of mind.
To get around the problem, insurance companies developed the long-term-care annuity. This combines a deferred fixed annuity with LTCI. The insurance is provided via a long-term-care rider, a policy add-on that lets the annuity pay benefits for long-term care.
If you don’t ever use the LTCI benefit or not much of it, you or your heirs will have the remaining annuity value to use.
LTCI annuities are complex and can have lots of moving parts, so they have both pros and cons. While the concept isn’t new, insurers are always looking to improve their products and offer more flexibility and features.
Ken Nuss is the founder and CEO of AnnuityAdvantage, a leading online provider of fixed-rate, fixed-indexed, and lifetime income annuities. Ken is a nationally recognized annuity expert and widely published author. A free rate comparison service with interest rates from dozens of insurers is available at https://www.annuityadvantage.com or by calling (800) 239-0356.
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