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Retirement Plans Use
Annuities to Provide Income Until Death
Only an insurance Annuity can
guarantee to pay for a lifetime, no matter how long that
lifetime lasts. A bank can pay only for a stated number of
years. Insurance annuities create a pool, using an average
lifetime and fund to pay for every annuitant. Unused payments
intended for early die-ers are then forwarded to the long live-ers.
There are safety choices available, but these guarantees do
reduce the payments from the lifetime, no-period certain choice.
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Period-Certain - The
annuitant collects for life, but a beneficiary would receive
the balance of the chosen minimum number of payments.
-
Cash Back - The annuitant
collects for life, but payments must continue to a
beneficiary until the total contribution has been received.
-
Joint - Life and Survivor
Income - Provides a level of income while a couple lives,
then reduces after either death, for the lifetime of the
survivor.
One couple was concerned
about the care of their brain-damaged daughter after their
deaths. Each parent bought an annuity with her lifetime care as
the “survivor”. A May-December marriage used an
annuity (funded by life insurance) for the much younger wife, to
provide a monthly income for her lifetime. Any gigolo conning
her out of her assets would only succeed for that month. She
would receive another payment on the first of the next month,
remaining financially secure. All annuities use the same
funding vehicle to accumulate contributions. Contributions can
come from regular payments made each month over a lifetime. A
large contribution can come from anywhere; a 401 (k) retirement,
and IRA rollover, an inheritance, or a cashed-in a stock.
Tax-Qualified annuities have maximum yearly contribution limits,
so larger deposits may need to be split between them and a Tax
Non-qualified annuity.
There are different types of
annuities:
1.
Immediate Annuity – the first income payment begins within
30-days of purchase
2.
Deferred Annuity – the first income payment begins over 30-days
from purchase
3.
Tax Non-Qualified Annuity – contributions do not give a tax
deduction
4. Tax-Qualified Annuity – may give a tax deduction for the year of
contribution (see a tax professional)Tax-Qualifieds are further
broken into:
5.
ROTH IRA (contributions were income taxed, but the interest will
never be taxed. The account is allowed to accumulate past age
70½).
6.
Traditional IRA (contributions are tax deferred, listed as a
credit on line 32 of the IRS Form 1040. The account accumulates
tax deferred but withdrawals are taxed. The hope is that the tax
bracket is lower after retirement than when the contribution was
made. Withdrawals must begin by age 70½.)
7.
Fixed Annuity – The account earns investment results, like any
interest-bearing account. Most fixed annuities pay at least a
guaranteed minimum return (interest), no matter how bad the
economy is. The value can never be less than the sum of the
contributions.
8.
Variable Annuity – Each contribution purchases units at the
current rate, much like when buying stocks. The entire number of
units is worth whatever the rate becomes. The rate may vary to
less than the purchase rate.
Annuities are useful in
two situations.
A large amount of cash needs
to be safely held for the future, without becoming taxed first.
An insurance annuity grows while deferring any income taxes.
They are secure. (the ‘I’ in FDIC is insurance.) Less than 5% of
life insurance vanished during the Great Depression of the
1930s. There is time to refine a plan for the large fund, as all
available options remain open until one is chosen and
withdrawals begin. The account is accessible at any time,
although some early-withdrawal penalties may apply until age 60.
A steady stream of additional
income will be needed. A retirement calculator can assist in
determining how large an income will be provided by Social
Security, Pension, Cash-value Life Insurance, investments and
existing savings. But that is rarely large enough for the rest
of a lifetime. Once the shortage is calculated, an annuity can
project the monthly contributions necessary to achieve the
desired income.
A little fiscal deprivation
now is worth sending money into the future. Small, regular
contributions can grow into an amazing fund, when given time. An
annuity is an effective financial conduit between a young person
and their aged self.
Learn more about annuities on our site or to get a free
consultation visit our online
annuity form |
