An annuity’s place within a retirement portfolio is often understated, but fortunately, annuities aren’t as complicated as people think. To put it simply, an annuity allows you to deposit a sum of money with a life insurance company and, after a period of time, the life insurance company provides you the option of turning your accumulated deposit value into a series of guaranteed income payments with interest. It may help to think of an annuity as similar to a Certificate of Deposit (as offered by a bank or credit union) — you deposit money into the bank, it is left on hold with the bank for a period of time, and after maturity you can take those funds back out without penalty.
The difference with annuities, though, is twofold. First, annuities often offer higher interest rates that are locked in for a longer duration of time than are available on most Certificates of Deposit. Second, annuities can accumulate interest on a tax deferred basis, enabling the annuity owner to control when and how future taxation of interest earnings will occur.
Annuities are a low risk, but rewarding addition to an individual’s retirement portfolio, and can be purchased throughout one’s life, allowing increased funding flexibility and interest rate diversification.
Consider an annuity while you’re still in your working years.
Saving for retirement is important at any age, but one could argue that it’s most important to start saving for your golden years when you’re young. This is because the money you save has the potential to compound interest, amplifying the future value of your investment over time. You earn interest on prior years’ interest without paying taxes on those earnings and the earlier you start saving throughout the course of your employment years, the greater potential your investment has to reach future goals.
Many people take advantage of employer-sponsored retirement accounts and Individual Retirement Accounts during their working years — and this is absolutely a great tactic — but for those who want to diversify their retirement portfolio, an annuity can help reduce the amount of additional taxable income during working years when tax rates are often at a higher point than they may be after retirement. That said, early on in your career, you may not have the money to make a single large deposit and watch it grow for years — and many annuities do require a single large deposit to initiate the contract.
Some annuities, however, allow you to make periodic contributions over time, which allows young people the flexibility to deposit only what they can afford, when they can afford it and gives the funds contained within the annuity plenty of time to accumulate. This type of annuity — at Navy Mutual, we offer a Flexible Premium Retirement Annuity — makes a great addition to the retirement portfolio of a risk-averse investor or a young person who wants to diversify their portfolio among various risk profiles.
Deposits to this type of annuity earn interest until the owner decides if and when they initiate income payments in retirement or continue to increase the annuity’s value through ongoing contributions.
Consider an annuity in retirement.
Once you reach retirement age, it becomes important to protect the money that you have already saved, while doing the best you can to earn a “real” rate of return that exceeds average inflation. Many people start tweaking their investment allocation to less risky options — moving away from stocks and other variable assets and moving toward bonds, adding annuities, and putting more funds in CDs and high-yield savings accounts. This shift is important because money that is invested in the stock market during your retirement years can be greatly affected by market changes, and not always positively. In economically tough times, funds that have lost value have little time to recover before they may be needed to provide retirement income, which can affect the longevity of the overall retirement portfolio. Protect your future by protecting your money.
An annuity can provide that often desired stability to retirees in one of two ways, depending on when a retiree wants access to their money. For older individuals who want immediate access to a portion of their earnings and investment deposit, but also want stability in a fluctuating market, Single Premium Immediate Annuities may best fit their needs. Younger retirees who have access to funds but don’t necessarily need guaranteed income yet may be able to watch their funds accumulate a little more before receiving payments by purchasing a Single Premium Deferred Annuity.
A Single Premium Immediate Annuity provides income payments within one year of the contract purchase date — most often distributed as monthly payments that can be set up to continue for the remainder of the annuitant’s life. Single Premium Immediate Annuities are purchased with a lump sum of money that typically comes from the liquidation of other assets, like a home or investment portfolio (which may not be available to young investors but is more accessible to retirees). The interest rates provided by one of these annuities are based on the length of time a retiree will be receiving payments and the original lump-sum payment, but they’re often higher than rates associated with a savings account or CD.
A Single Premium Deferred Annuity goes through an accumulation phase before providing the option of income payments to the retiree — this allows it to grow at a defined interest rate for a specific period of time, thereby increasing the value of the annuity and potential income. While the interest rate and the length of this accumulation period are chosen at purchase, retirees are not required to initiate payments immediately after this period ends — the annuity will continue to earn interest until the owner decides distributions should occur. This makes this type of annuity a particularly good option for people who know that they will want a guaranteed income payment at some point in the future but know that they don’t need those payments for at least five years. Retirees that use this type of annuity do not need access to a significant sum of money and want to protect a portion of their low-risk assets from economic fluctuations, guaranteeing the option for income payments in the future.
The security of an annuity, and the peace of mind that security brings with it, cannot be overstated. If you’re interested in learning more about how an annuity can fit into your retirement portfolio and provide long-term financial benefits, you can schedule an appointment with an annuity expert or request more information online.