Learn about fixed and variable annuities and how you might use them to help turn your retirement savings into income for life.
Throughout your working life, you’ve focused on saving money for the future. Now it’s time to switch gears and focus on how you’ll turn your savings into income that may potentially need to last 30 years or more. According to the Social Security Administration, about one out of four people age 65 today will live past age 90, and one out of 10 will live past age 95.
Planning now for lifetime income may help allay any fears of outliving your savings. And as part of this plan, you might want to put a portion of your money in an annuity.
Like pension plans and Social Security, annuities offer the potential for lifetime income, which you could use to help meet your everyday needs in retirement. This steady stream of money could supplement your 401(k) or IRA savings and potentially free up the money in those accounts for other things such as travel or unexpected expenses. The payments are usually made monthly and the amount you receive depends on many factors, including your account balance, life expectancy, and the type of annuity you select.
Knowing when you want annuity payments to begin may help you narrow down your choices. If you want to start receiving income right away, an immediate annuity might make the most sense for you. With a deferred annuity, you purchase it now and the payments start at a designated date in the future. This means your money has an opportunity to grow tax deferred. You don’t pay taxes on any earnings until distributions begin.
Several things may influence your start date, including how much you have saved in other sources, such as an IRA or employer-sponsored retirement plan, and your anticipated expenses in retirement. For example, depending on your situation, you might elect to defer payments until age 80 when you may need the money to help pay for long-term care. To help you in your decision-making, check out the Income Planning Worksheet (see figure 1).
Once you’ve identified your time frame, the next step is to decide which type of annuity payment you want to receive: fixed or variable. Depending on your goals and investment preferences, one might be more appealing than the other.
Possible fees and expenses include:
You don’t have to pick just one type of annuity. Based on your financial situation, you might decide it makes sense for you to allocate some of your savings to an immediate fixed annuity to help pay your monthly bills and to put another portion in a deferred annuity to help cover future expenses. The choice is yours.
Increased life expectancies and medical advances mean your retirement years could last as long or longer than your working years. That's why it's important to create a plan for turning your savings into lifetime income. Having this plan may help you feel more confident you'll be able to enjoy the lifestyle you want in retirement.
Let’s find out if an income-generating annuity might make sense for you.
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