Individuals seeking a reliable source of income in retirement, or as part of their general portfolio, typically envision withdrawals from a brokerage account. However, annuities are often overlooked as a robust addition to a financial plan. They offer a range of advantages that other investment products do not, often in the form of more customizable options.
Here are some of the main advantages of including an annuity in your financial plan, as well as guidance to strategically optimize how the annuity works for you.
The Types of Annuities
In order to select the ideal annuity for a specific financial circumstance, investors should first understand the various types of annuities. While the annuities offered by different insurance companies will differ slightly in rate and terms, they still fit into defined subgroups.
These include fixed annuities, with a rate that does not fluctuate and pays out consistently for a stipulated period of time; and MYGAs, which accumulate at a set rate for a predetermined term rather than providing periodic payments.
Variable annuities, by contrast, are less predictable as their rate may change, or they may track an underlying index that follows market trends. This can provide valuable growth when the market is rising, but it exposes investors to downturns as well.
No matter which type of annuity you select, there are a number of advantages that are unique to this type of financial product.
No Cap on Contributions
Most individuals will contribute to other retirement options, such as 401(k)s or Roth IRAs, before they consider an annuity. However, these products come with a maximum contribution limit. In the case of a Roth IRA, for example, contributions are limited to around $6500 per year depending on age, income and even tax filing status.
Individuals married but filing separately cannot contribute to a Roth at all, nor can those who earn above a certain threshold. Similarly, high earners will gradually phase out of eligibility for 401(k) contributions.
While these vehicles are tax advantaged, they are limited by multiple factors that can slow down how quickly a person can save for retirement. Annuities do not function in this way.
Individuals have the option to select an annuity contribution based on their budgetary constraints, including those without a contribution limit. However, it should be noted that immediate annuities are an exception to this rule.
Unlike deferred annuities, which enable individuals to make multiple contributions over time, immediate annuities require a single lump sum payment.
No Withdrawal Age
The most popular savings options are restricted by an age requirement. 401(k)s cannot be touched without penalty before the age of 59½ (or by using very specific eligibility criteria, which can reduce the age to 55 in certain circumstances).
Roth IRAs also apply the 59½ age rule, with penalties applying in most cases for money withdrawn before this benchmark. On the other end of the spectrum, individuals are required to take Social Security payments starting at age 70, regardless of whether they want to or not.
Annuities do not have a mandatory age for withdrawals. You can select an annuity scheme with a term that aligns with your preferences, which permits you to receive payments at the age of their choosing.
For instance, if you intend to retire at an early age, say 30, and want to use an annuity to finance your expenses, it is entirely permissible. Similarly, if an individual prefers to defer payments until later in life, say at 75, this is also a viable option.
Tax Advantaged Status
Some annuities, such as MYGAs, are tax advantaged in at least one way. MYGAs are tax deferred meaning that taxes are not paid on any of the accumulated earnings until they are received as income. This allows a larger sum of money accrue than if it were in another vehicle in which taxes on earnings are paid annually, such as a certificate of deposit.
Potential for Lifetime Income
Many people assume that their brokerage account will last the rest of their lives. However, the only product guaranteed to last for the rest of an investor’s life is an annuity, because that guarantee is backed by an insurance company.
Brokerage accounts can suffer from market downturns that reduce the balance, but a lifetime annuity will always pay the same amount, no matter what happens. This stability is a significant advantage for those looking to shore up the reliability of their financial plan.
Choose the Right Annuity for Your Goals
An annuity should suit your specific needs and goals as an investor. Pillar Life Insurance offers an online resource where individuals can select the right annuities to fit their financial plans, without spending time with a middleman. Take a look at our annuity products to determine what fits into your immediate and future goals.
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