It’s appropriate that The Rolling Stones current US tour is being sponsored by the Alliance for Lifetime Income, which provides consumer education about annuities. One of the Stones’ earliest hits was "Time Is on My Side."
Time is both the friend and foe of people saving for retirement and in retirement. Annuities work to put time on your side.
When you’re saving up for retirement, time is your friend. But in retirement, time can be your enemy. If you live to an advanced age, you could run out of money as expenses and inflation mount over the years. Annuities can provide guaranteed lifetime income so you don’t go broke.
Here’s how annuities can help set you up for a better retirement during the two main stages of your financial life. When you’re working, you’re in the accumulation phase. This is when you’re saving for retirement. The sooner you start — even if it’s just a small amount — the better.
Tax-deferred accounts, including IRAs, 401(k) plans and similar arrangements are the place to start. But they’re not the complete answer because of annual limits on contributions. Most people need to also save outside of their qualified retirement plans.
And that’s where deferred annuities come into play. While they don’t offer a deduction for contributions, they too defer taxes. For as long as you don’t remove money from the annuity, the earnings won’t be taxed and can accumulate faster. You can contribute as much as you like.
There are several options in deferred annuities during the accumulation stage.
A multiyear guaranteed annuity pays a set interest for a set period of time, usually three to 10 years. You make a single deposit, and there’s no sales charge, so it behaves much like a bank certificate of deposit (CD).
For people who don’t mind a fluctuating interest rate in exchange for potentially higher returns, a fixed indexed annuity can be another good choice. This annuity offers the opportunity to get a good portion of the stock market’s gains while offering complete protection from loss.
It credits interest based on the growth of a market index, such as the Dow Jones Industrial Average or S&P 500. And that’s the reason it’s called indexed. But you lose nothing in down years, and that’s the reason it’s called fixed.
A deferred income annuity is another option. Also called a longevity annuity, it combines tax-deferral with a guaranteed future stream of income.
It defers payments until a future date that you choose. Most buyers choose to start taking payments when they turn 80 or older. You’ll know the exact amount of monthly lifetime income you’ll receive and the date when it begins.
Unlike other deferred annuities, the variable annuity offers few built-in guarantees. It is like a set of mutual funds within an annuity wrapper that provides tax deferral and optional extra-cost benefit riders. Among annuities, it offers the highest growth potential plus the highest potential risk.
By using one or more of the deferred annuities listed here, you can defer taxes for many years and put the power of tax-deferred compounding to work for you. In other words, you put time on your side.
Eventually, you’ll want to retire. Annuities are the only financial product that can provide a lifetime guaranteed income. They’re basically the opposite of life insurance in that they offer financial protection for living to a ripe old age.
If you bought a longevity annuity, you’ll know exactly how much income you’ll receive.
If you have an existing multi-year, fixed-indexed or variable annuity, you may choose to annuitize it. You’ll convert the cash value into a stream of income guaranteed for whatever period of time you choose, such as 20 years or your lifetime—the most popular option.
And you’ll still get tax benefits as each payment will include taxable income and nontaxable return of principal. If you live long enough, eventually the principal will all be returned to you and the income will then become fully taxable. But, by then, you’ll be well ahead of the game.
If you’ve already reached retirement and haven’t yet invested in an annuity, there’s still a way to put time on your side. You can buy an immediate annuity.
With it, you’ll typically start receiving monthly payments within about a month of purchase. Besides providing income that replaces your salary or self-employment income, an immediate income annuity also insures against the risk of living longer than average. As with annuitization, you transfer the risk to an insurance company in exchange for a single premium payment.
Again, you’ll get tax advantages as well because each income payment is partly non-taxable.
When you’re planning to improve your financial future, don’t procrastinate. As Mick Jagger also sang, “Time Waits for No One.”
Annuity expert Ken Nuss is the founder and CEO of AnnuityAdvantage, a leading online provider of fixed-rate, fixed-indexed and immediate-income annuities. He launched the AnnuityAdvantage website in 1999 to help people looking for their best options in principal-protected annuities.
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