There are many ways to grow your savings when it comes to retirement planning. A retirement account, like a 401(k) or TSP, allows you to contribute a set amount of money from your paycheck to your account each year – and hopefully to take advantage of a company match. An IRA lets you make a similar contribution (with lower limits) if you do not have access to an employer-sponsored retirement account or simply want to put more money aside. But what if you already have retirement accounts and are looking for another way to protect your income after you finish working?
Enter annuities.
An annuity is a contract between you and an insurance company. You provide either a series of contributions or a lump-sum amount, and the insurance company returns the money to you with interest in a series of scheduled payments.
Why annuities?
Safety.
When it comes to retirement and financial planning in general, there are rarely any guarantees. In fact, a standard investment disclosure is “Past performance is no guarantee of future results.” With an annuity, though, there is one. Annuities can provide guaranteed income for the duration of your entire life if you choose a life income payout option. This is different from your IRA, 401(k), or TSP, where it is possible for your withdrawals to cause a zero balance. Annuity payments will never cause a zero balance, because an insurance company pools the longevity risk of all insured parties – which allows them to pay out a systematic monthly income payment regardless of how long you live.
You can choose between two different types of annuity payouts: fixed and variable. A fixed annuity payment means that the amount you will receive for each payment is set in the contract. The amount will never increase or decrease, and you can use that number when it comes to budgeting for the remainder of your years. Variable annuity payments usually guarantee a minimum floor of income but can change based on the performance of an underlying investment portfolio. Some insurance companies offering variable annuities may guarantee that you will not lose your initial investment (meaning your beneficiary may receive a return of premium at death), but this is not the case with every variable annuity. On the bright side, if the underlying portfolio does well, you may get a higher payment than you were expecting.
Navy Mutual only offers fixed annuities, so you can rest assured that your future payments are guaranteed!
Ease.
Instead of figuring out how to budget a lump sum of cash, like that which you might have in a savings account or receive as a payout from an investment, you know how much money you will get each month from an annuity. This provides you with peace of mind, knowing that your bills will be covered because money is consistently coming in. You do not have to worry about mismanaging funds like you might with those from other sources because, like with Social Security income, benefits are not paid out all at once.
Furthermore, you don’t have to do anything to receive your annuity payments. Once you have made the initial premium deposit, you will receive your payments without having to log in to any accounts to move money around. Once you set it up, you could even forget about it and the payments would still come.
Tax savings.
Tax deferral and compound interest should be primary considerations when deciding what type of accounts are appropriate for retirement planning. A non-qualified annuity, or an annuity not used to fund a 401(k), TSP, or IRA, has another substantial benefit that is often overlooked. Premium contributions are made with after-tax dollars, which means that when those deposits are ultimately returned in income payments, a portion is tax free – this is known as an “exclusion ratio.” This means that the owner gained more interest due to tax deferral while accumulating and pays less taxes in retirement when income payments begin.
Depending on what payout option you choose, you may be able to pass along your annuity payments to a beneficiary after your passing. Be sure to check the payout option specifications provided by the insurance company from which the annuity is purchased.
Navy Mutual offers four payout options:
- Lump Sum: You receive one payment of the accumulated cash value of the annuity.
- Fixed Period: You receive payments for a set period between one and 30 years, at the completion of which, payments cease. If you were to pass away during this period, your beneficiary would receive the remainder of the payments.
- Life Income with No Death Benefit: You receive guaranteed payments for the remainder of your life. Payments cease when you pass away.
- Joint and Survivor Income: Both you and a joint annuitant receive payments until one of you passes away. The surviving annuitant continues to receive a previously decided percentage of the original payment amount for the rest of their life.
Having an annuity in your portfolio can provide a margin of safety, generate predictable income, and enhance your standard of living during retirement.
Interested in purchasing an annuity from Navy Mutual? You can request more information here.
Note: Navy Mutual annuities are non-qualified annuities, meaning that they must be purchased with after-tax dollars that are not contained within a retirement account. Not available in New York. Interest rates are based on Navy Mutual’s current rate schedule. Rates may change without notice. For current rates, please call (571) 481-2313.