Retirement Planning
Everyone wants a golden retirement. But saving for retirement is no easy task. Given the challenges facing social security (fewer workers, increasing life expectancy, etc.), we may need to rely more on our personal savings when it's time to retire.
Today, we have a myriad of options to help each of us prepare for the golden years. Yet, without a specific plan of action, many people find themselves falling short when it is time for them to leave full time work and fund their retirement.
Take the time to review your options, and ensure that you're prepared when it's your turn to retire. And when you're ready to speak with a professional about saving for retirement, call us at 503.655.7601.
Annuities are flexible insurance contracts designed to provide income and help you achieve long-term savings goals.
An annuity is a long-term contract between you and an insurance company. In essence, the same company that insures your home or protects your family may also help you save for retirement.
After making a single lump-sum premium payment, or a series of periodic payments, individuals can then receive regular annuity payments from the insurance company. These payments can be made over a definite period of time, or they can last a lifetime. All payments and benefits are based on the claims paying ability of the underlying insurance company.
Payments to the annuity owner can also be tailored to begin after the contract has been established for a number of years, or they can begin immediately after the first premium payment is made.
Annuity owners even have the choice of receiving regular fixed interest rates (better known as a "fixed" annuity), or having their annuities change in value with the market depending on the performance of underlying variable accounts (referred to as a "variable" annuity) which is subject to the risk of loss.
Over time, insurance companies modified and enhanced both types of annuities; however, their basic premise has always remained the same. And because annuities are issued by an insurance company, current tax law allows them to be tax-deferred.
A Myriad of Options
Tax-deferral is not the only reason why annuities appeal to certain investors. While they typically have maturity dates of 5-7 years, annuities require no medical exams, and can usually be opened by filling out a basic annuity contract.
Today, there are hundreds of annuities to choose from, designed for different retirement goals. When it comes to fixed annuities, insurance companies sometimes offer higher initial rates to attract would-be buyers, while other companies offer consistent interest rates throughout the life of the annuity contract. Rates, maturity periods, and death benefits are just some of the options to look for in a fixed annuity.
Annuity Contributions and Payouts
You can use after-tax money to deposit into an annuity, or you can fund your annuity by rolling-over qualified money. However, this may not be advantageous since the funds are already in a tax-deferred account - the benefit of using a tax deferred vehicle like an annuity, absent other considerations, may be redundant.
Up until this point, we've focused primarily on options available during the accumulation phase. But what about the payout phase, when the annuity returns its value to you? Fortunately, annuities can also provide incredible flexibility during the payout phase, as well.
When the payout phase begins, you can opt to receive your annuity's value in one lump-sum, or you can elect to receive a steady stream of payments in regular intervals (e.g. monthly, quarterly, etc.).
If you decide to opt for a regular stream of payments, many insurers will allow you to have annuity payments last for a set amount of time (such as 10 or 20 years). Many contracts also allow you to receive payments for as long as you and your spouse live.
As a rule of thumb, the longer your payment period, the smaller your payments will be. These conditions are clearly spelled out in the terms of the annuity.
Do you need immediate income? Some annuities are designed to be immediate annuities. Immediate annuities have no accumulation phase whatsoever. They begin paying you in regular increments the moment you purchase the contract.
Insurance Company
The quality of the insurance company is important, especially when purchasing a fixed annuity. Working with a respected, highly-rated insurer can help mitigate default risk, since all benefits are based on the claims paying ability of the underlying insurance company.
Benefits vs Drawbacks
Annuities have several common benefits, including tax deferral, contract guarantees, no contribution limits and flexible payment options. Some of the drawbacks include lack of liquidity and possible penalties for early withdrawal, in addition to the costs associated with purchasing and maintaining the contract, which should be discussed with you fully prior to making an investment decision.
If you are a conservative investor looking for a consistent way to build your retirement savings, then fixed annuities may be an appropriate solution for you.