Could an Annuity Help Your Retirement Funding Strategy?

Happy Retired Couple

Are you approaching retirement? Worried that you won’t have enough money or income to fund the type of retirement you want for yourself? If so, you’re not alone. According to a recent survey from Gallup, more than half of all Americans are concerned about their ability to afford retirement. In fact, retirement is America’s top financial worry.

The good news is that you have plenty of tools at your disposal to help you fund a secure and enjoyable retirement. The challenge is finding the right tools and options for your specific goals, needs, and concerns.

One tool you may want to consider is an annuity. Annuities are often perceived to be complicated. However, the truth is that they can be powerful retirement funding vehicles when used in the appropriate situations.

Below are a few ways in which an annuity could help you enjoy a secure retirement. If you’re approaching retirement and haven’t yet considered how an annuity may fit into the puzzle, now may be the time to do so.

Guaranteed Income

You’ll likely enjoy some level of guaranteed lifetime income from Social Security in retirement. You may also have a pension. However, if those two income sources don’t cover all your expenses, you’ll have to fund the gap with distributions from your retirement savings, such as your IRA or 401(k).

You retirement savings may be exposed to market volatility and withdrawals from those accounts likely aren’t predictable or guaranteed. That could create some anxiety for you, as one market downturn could substantially impact your income.

You can use an annuity to minimize this risk. Annuities offer several ways to convert a portion of your savings into a guaranteed lifetime stream of income. One method is to purchase a single premium immediate annuity (SPIA). You contribute a lump sum amount into the SPIA, and the insurance company then converts that into a guaranteed income stream. The income amount is based on your age, the contribution amount, and other factors.

Another option is to purchase a deferred annuity with a guaranteed minimum income benefit. Your funds could accumulate either through market appreciate or interest accumulation, depending on the type of annuity you purchase. However, an optional rider lets you take a withdrawals every year. As long as you don’t exceed the withdrawal limit, the distributions are guaranteed for life, no matter how the annuity performs.

Tax Treatment

Taxes don’t stop just because you stop working. In fact, taxes may be one of your largest expenses in retirement. You may have to pay taxes on everything from Social Security benefit to pension income to retirement distributions and more.

Annuities offer beneficial tax treatment that could help you manage your liability. Fixed annuities, indexed annuities, and variable annuities are all tax-deferred vehicles. That means you don’t pay taxes on growth as long as the funds stay in the annuity contract. When you take a withdrawal, you pay taxes on growth, but not on your original premiums.

Immediate annuities are taxed differently. Your annuity payments are a blend of your original premium plus some portion of interest. The portion that represents interest is taxable, but the return of your premium is not. When you open the policy, the annuity carrier will calculate your payment as well as the taxable portion. However, you can use an immediate annuity to generate guaranteed retirement income that is partially tax-free.

Keep in mind that if your annuity is owned inside an IRA, the annuity conforms to the IRA’s tax rules. Thus, distributions from an annuity inside a traditional IRA would be taxable, while distributions from an annuity inside a Roth would be tax-free.

Downside Protection

Many people become more conservative in their investment strategy as they approach and enter retirement. That’s natural. After all, in retirement you don’t have time to overcome a market downturn. A drop in your investment values could threaten your income and your financial stability.

However, you may not be able to avoid risk altogether. Risk and growth are closely related. You’ll likely need some level of growth to fund your income needs and make your money last through your retirement. Many so-called “risk-free” vehicles also offer little or no growth potential.

Annuities, however, offer the opportunity to grow your assets with little downside risk. Deferred fixed annuities pay a set interest rate over a specific period of time with no potential for loss. Similarly, fixed indexed annuities allow you to earn interest based on the performance of a market index. Again, these policies are usually guaranteed so you can’t lose your principal.

Variable annuities may have downside risk. In a variable annuity, you invest in sub-accounts, which are similar to mutual funds. While a variable annuity may offer growth potential, your asset value can also decline. However, even variable annuities offer optional riders that let you minimize your risk.

Ready to learn how an annuity can benefit your retirement funding strategy? Let’s talk about it. Contact us today at America’s Annuity. We can help you analyze your needs and implement a plan. Let’s connect soon and start the conversation