By Angela Epley
When you’re young, there’s more time to recover from downswings in the market, but as you approach retirement age, your portfolio (and sanity!) may be better off if funds are less sensitive to these events so you can confidently count on a certain amount of income.
A helpful way of thinking about annuities is as a counterpart, or sibling, to life insurance. Whereas life insurance is an insurance contract that offers financial protection for your loved ones should you die unexpectedly or too soon, an annuity is an insurance contract that offers financial protection for you (and your loved ones, if they depend on your income) if you live longer than expected.
“Income annuities can help make sure that you have a steady, guaranteed income source throughout life,” says CERTIFIED FINANCIAL PLANNER™ Professional and USAA advice director Robert Steen.
Annuity benefits can vary depending on the type of annuity you get, too. Typically, annuities come in two main flavors: deferred or immediate.
These types of annuities let you accumulate a chunk of savings in a tax-deferred contract to turn into a monthly fixed income sometime in the future. Other guaranteed savings annuity benefits include guaranteed growth without any market risk, thanks to guaranteed minimum interest rates and tax-deferred compounding. That means you don’t have to pay any taxes on the growth as interest is added to your original lump sum and snowballs into a larger amount over time.
That said, you’ll pay tax on any growth when you’re ready to get money back in the form of regular monthly income payments, so be sure to factor that into your strategy. “Distributions from annuities held in traditional IRAs are generally taxed as ordinary income,” Steen says.
These types of annuities let you immediately transform a chunk of savings into a guaranteed monthly fixed income. You can choose to get guaranteed payments for life, for a set period or both. Some offer the option to name another person (like a spouse) as a recipient so payments will still be made as long as either of you is alive. This helps ensure you’ll get all the money back that you put in, along with the possibility to receive even more. USAA’s Single Premium Immediate Annuity benefits also include a special one-time withdrawal for certain financial emergencies, like large medical bills, foreclosure or even funeral expenses.
Whether you want an annuity to provide a steady stream of income now or later, weigh the merits of a fixed annuity vs. a variable annuity. Fixed annuities have a fixed rate of interest for which your funds are guaranteed to grow every year, which can be appealing to conservative investors who want calculations they can count on. Conversely, variable annuities offer investment rates that fluctuate and vary (hence the name), which means you have a wider variety of investment options, so you can customize investments to your risk tolerance. Note: This means variable annuities are still more sensitive to economic markets, so your interest rate will depend on how well the markets are doing. Investors with a healthier risk appetite might find these more appealing.
Most of us hope to enjoy our golden years in comfort and contentment, and ensuring you have enough income to support the longest-lasting version of this vision can go a long way toward relieving anxiety or worries. Peace of mind, then, may be one of the most valuable annuity benefits to consider.
Curious about annuities? Run some calculations on our Deferred Annuities Calculator or Income Annuities Calculator² to estimate how much an annuity could help you in the future.
²This calculator is a self help tool. You should enter figures that reflect your individual situation. This information is provided for illustrative purposes only. The above life insurance needs estimate is based in part on the age and information you entered and results may vary depending on your individual circumstances.
Annuities are generally suitable for long-term investing, particularly retirement savings.
An annuity is a long-term insurance contract sold by an insurance company and designed to provide an income, usually after retirement, that cannot be outlived. There are fees, expenses and surrender charges that may apply.
Money not previously taxed is taxed as income when withdrawn. Withdrawals before age 59½ may be subject to a 10% federal tax penalty.
Single Premium Immediate Annuity (SPIA): Form ASI94832ST 10-11; in NY, NSI97130NY 10-11, NSI94897NY 10-11 (SPIA form varies by state and by payout option). Call for details on specific costs, benefits, limitations and availability in your state.
The contents of this document are not intended to be, and are not, legal or tax advice. The applicable tax law is complex, the penalties for non-compliance are severe, and the applicable tax law of your state may differ from federal tax law. Therefore, you should consult your tax and legal advisors regarding your specific situation.
Certified Financial Planner Board of Standards, Inc. owns the certification marks CFP® and CERTIFIED FINANCIAL PLANNER™ in the United States, which it awards to individuals who successfully complete the CFP Board’s initial and ongoing certification requirements.
Guarantees apply to certain insurance and annuity products and are subject to product terms, exclusions and limitations and the insurer’s claims-paying ability and financial strength.
USAA means United Services Automobile Association and its affiliates. Financial advice provided by USAA Financial Advisors, Inc. (FAI), a registered broker-dealer, USAA Investment Management Company (IMCO), a registered broker-dealer and investment adviser, and for insurance, USAA Financial Planning Services Insurance Agency, Inc. (known as USAA Financial Insurance Agency in California, License # OE36312). Investment products and services offered by IMCO and FAI. Life insurance and annuities provided by USAA Life Insurance Co., San Antonio, TX, and in NY by USAA Life Insurance Co of New York, Highland Falls, NY. Other life and health insurance from select companies offered through USAA Life General Agency, Inc. (known in CA (license #0782231) and in NY as USAA Health and Life Insurance Agency). Banking products offered by USAA Federal Savings Bank and USAA Savings Bank, both FDIC insured. Trust services provided by USAA Federal Savings Bank.
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