Annuities are often seen as a versatile financial tool for retirement planning, offering a range of benefits beyond guaranteed income. Here are more reasons to consider annuities as part of your retirement strategy:
1. Meet Retirement Income Goals
Will your retirement income be stable and predictable?
Retirement income can come from various sources, including Social Security, pensions, and investment portfolios, but not all are equally reliable. Market downturns or economic events can negatively affect income from investments tied to the stock market. (Related: Four reasons why your 401(k) may not be enough)
Annuities, on the other hand, provide a guaranteed source of income that can strengthen the stability of your retirement plan. With income annuities, you can choose to start receiving payments immediately or at a specified time in the future, offering a reliable stream of income. This can be especially useful if you are nearing retirement and need to reduce the risk of withdrawing from an investment portfolio during a market downturn.
There are trade-offs, though. Guaranteed-income annuities typically provide little or no liquidity, so they may not be ideal if you need easy access to the underlying funds. (Learn more: The pros and cons of annuities)
2. Prevent Outliving Assets
One of the biggest concerns for retirees is outliving their assets.
People are living longer than ever, with the average 60-year-old expected to live at least another 20 years, according to the CDC. This longer lifespan means retirees need more money to last through their golden years. However, relying solely on a retirement portfolio might not be enough, especially with the decline of pensions and uncertainty around Social Security’s ability to meet all income needs. (Related: The looming retirement income crisis)
Annuities address this challenge by offering a lifetime income guarantee, ensuring you have a consistent source of income for as long as you live. Additionally, a specialized type of annuity, called a qualified longevity annuity contract (QLAC), allows you to delay required minimum distributions (RMDs) and the taxes associated with them. This can help extend your retirement savings further. (Learn more: Retirement needs vs. RMD rules — and the QLAC)
3. Diversify an Investment Portfolio
While most retirement portfolios rely on stocks and bonds, these investments can be volatile and influenced by market cycles. Annuities offer an opportunity to diversify and reduce risk.
Deferred fixed annuities provide guaranteed interest rates and protection from market fluctuations, helping stabilize portfolio growth. For those seeking potential market gains, fixed index annuities offer interest based partly on the performance of an external index, while also protecting against losses during downturns.
For investors willing to take on more risk for the potential of higher returns, variable annuities offer a variety of investment options. Many variable annuities also come with riders that guarantee a certain level of income, regardless of market conditions.
Because annuities are insurance contracts, it’s essential to choose a provider with a strong financial backing to ensure your investment is secure.
4. Help Manage Taxes
Deferred annuities allow for tax-deferred growth, meaning you won’t pay taxes until you begin withdrawals or receive payments. While annuities don’t provide extra tax benefits for qualified assets like IRAs, they can help manage capital gains tax. For example, variable annuities allow you to defer paying taxes on gains until the money is withdrawn or paid out as income. (Related: 3 ways to manage capital gains tax bites)
5. Customize Your Financial Plans
Annuities offer flexibility, with options tailored to different financial goals. Some annuities focus on long-term growth and tax-deferred accumulation, while others are designed to meet immediate income needs.
For instance, a small-business owner might use a deferred income annuity to replicate a corporate pension. (Related: How one type of annuity can fit into a business owner’s retirement)
Annuities can also include features like death benefits, living benefits, survivorship benefits, and special riders for terminal illness or nursing home care, making them highly customizable to your personal circumstances
References:
MassMutual: 5 reason why you may need an annuity
Bankrate: Top 5 reasons to buy an annnuity
Planning for retirement is a responsibility that should be taken seriously, and choosing the right retirement annuity can be a prudent decision. Retirement annuities, acting as personal pension plans, provide a guaranteed income for life, bringing a sense of financial security and stability to retirees. As with any financial decision, it is essential to consult with a qualified financial advisor to assess individual needs and make informed choices. By harnessing the power of retirement annuities, individuals can confidently embrace their well-deserved retirement, knowing that their financial future is in capable hands.
Talk to Hazard & Siegel when you need a comprehensive lifetime financial solution.
Contact us today at 315-414-0722, or visit our personal investing page.