With economic uncertainties and market fluctuations, it’s natural to feel uneasy about your financial security. However, now might be the perfect time to consider purchasing annuities to help safeguard your retirement income.
Annuities are financial products that provide a stream of income payments to the holder over a specified period, typically during retirement. They are purchased with either a lump sum or through periodic payments, and in return, the annuitant receives regular payments, either for a fixed period or for the rest of their life.
Annuities can have various features and options, like fixed or variable interest rates, a stream of income, and death benefits. They are often used as a tool for retirement planning to provide a steady income stream and help mitigate the risk of outliving one’s savings.
In this blog post, we’ll explore why annuities may be a smart investment choice for you, and how Johnson Wealth and Income Management can assist you in purchasing them and helping you secure your financial future.
Annuities 101
You try to protect your car, home, and your health with insurance, but are you trying to protect your retirement income? With the potential for tax-deferred growth and a guaranteed income stream, annuities can be important in helping meet your retirement objectives.
So how do annuities work? Very basically, an annuity is a contract between you and an insurance company. The contract allows you to contribute money to a tax-deferred account. In return, you can get regular payments from the account as income. Many aspects of an annuity can be tailored to a buyer’s specific needs. Besides choosing between a lump-sum payment or a series of payments, you can also choose when to start receiving payments. An annuity that begins paying out immediately is referred to as an immediate annuity, while one that starts at a predetermined date in the future is called a deferred annuity.
The duration of the disbursements can also vary. You can choose to receive payments for a specific period or for the rest of your (or your spouse’s) life. Naturally, a lifetime of payments may lower the amount per check. However, it helps ensure that you don’t outlive the asset, which is an annuity’s key selling point.
Annuities typically have two phases:
1. Accumulation Phase – The period when the owner (or annuitant) is accumulating value in the annuity. This generally occurs before an individual retires.
2. Distribution Phase – The payout phase of an annuity is when the accumulated value is distributed (either in a lump sum or series of payments).
Retirement Advantages of Annuities
An important feature to consider with any annuity is its tax treatment. A significant benefit to using annuities for retirement planning is that you can put away large amounts of cash and defer paying taxes. Like a 401(k) or IRA, the growth on annuities is tax-free until funds are withdrawn. However, unlike other tax-deferred retirement accounts, there is no annual contribution limit. This is especially useful for people who are near retirement and need to catch up.
Annuity buyers can take advantage of two distinct features:
1. Guaranteed lifetime income – Annuities can give you a steady stream of income for a set period or for your lifetime.
2. Guaranteed death benefit – An annuity can pay money directly to your beneficiaries when you die, helping them avoid a lengthy probate process.
Why Buy Annuities Now?
- Stability in Uncertain Times: Annuities can offer a stream of income, helping provide stability and peace of mind, especially during times of economic volatility. With fixed annuities, you’ll receive a predictable income stream regardless of market conditions, helping ensure that you can maintain your standard of living in retirement.
- Protection Against Longevity Risk: One of the greatest concerns for retirees is outliving their savings. Annuities help mitigate this risk by providing income for life, protecting you against the possibility of running out of money in retirement. With increasing life expectancy, securing a reliable income source is more crucial than ever.
- Tax Advantages: Annuities offer tax-deferred growth, meaning you won’t pay taxes on earnings until you withdraw funds. This can be advantageous for retirees seeking to maximize their retirement income and minimize tax liabilities.
How Annuities Can Benefit You in Retirement
- Guaranteed Income: Annuities help ensure a steady stream of income throughout retirement, helping you cover essential expenses such as housing, healthcare, and daily living costs.
- Diversification: By incorporating annuities into your retirement portfolio, you can diversify your income sources, helping to reduce dependence on traditional investments like stocks and bonds. This diversification spreads risk and helps enhance overall portfolio stability.
- Peace of Mind: Knowing that you have a reliable source of income that will last a lifetime can help provide peace of mind and alleviate financial stress, allowing you to enjoy your retirement years to the fullest.
Choosing the Annuity That’s Right for You
Annuities are also separated by risk and how they generate earnings. That’s why you have fixed, indexed, and variable annuities.
Fixed Annuity: Here, you agree to deposit a lump sum of money or a series of payments and the insurance company agrees to pay a guaranteed rate of interest over a set period.
Other features of a fixed annuity include:
• It compounds on a tax- deferred basis.
• Principal and interest are guaranteed by the financial strength of the insurance company that issues it.
Indexed Annuity: This one earns interest based on the performance of an underlying financial benchmark like the S&P 500 Index and is subject to interest rate caps.
Other benefits include:
• It provides the opportunity to enjoy the benefits of positive upturns in the index (subject to a cap) with a limit to downside risk.
• You are not directly invested in the stock market or index.
Variable Annuity: This one places your money in investments that you select from a list made available by the issuing insurance company. Other features include:
• It does not offer guaranteed returns and may lose or gain value depending upon the performance of the investments.
• All guarantees are dependent upon the claims-paying ability of the issuing insurance company
How Johnson Wealth and Income Management Can Help
Annuities aren’t new. The annuity concept dates to ancient Rome, when citizens would make lump sum payments to a contract called an “annua” in exchange for payments received once a year for the rest of their lives. But as traditional sources of guaranteed retirement income, such as pensions, disappear, many retirees are wondering where to turn. An annuity may be the answer. The right annuity for you is the one that meets your personal and financial objectives. Due diligence is critical before you purchase an annuity. That’s why we recommend consulting with your retirement income advisor, or better, a fiduciary advisor, before purchasing annuities.
Our team at Johnson Wealth and Income Management is experienced in helping individuals navigate the complexities of retirement planning, including insurance and annuities.
With a commitment to acting in the best interest of our clients, our Fiduciary advisors provide personalized guidance tailored to each client’s unique financial situation and retirement goals. By leveraging their knowledge of annuities and retirement planning, our dedicated team help clients navigate the complexities of choosing the right annuity products to meet their needs.
Whether clients seek guaranteed income, protection against market volatility, or long-term financial security, Johnson Wealth and Income Management offers comprehensive support to help ensure a successful retirement journey.
Don’t leave your retirement to chance. Contact us today to learn how annuities can help you secure a prosperous and worry-free retirement. Let us be your partner on the path to financial freedom and peace of mind.
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