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How To Use Fixed Annuities For Retirement Savings

How To Use Fixed Annuities For Retirement Savings

One thing is certain in this life; you’re growing older with each passing day. And, sooner or later, you’ll have to retire from active duty as your physical and mental strength starts to decline. But, you’ll still need to survive before you bid the world the final goodbye.

Such facts have, perhaps, led you to look into retirement savings options, like pensions, defined contribution plans, such as 401k, 403b, and 457, individual retirement accounts, gold IRAs, nonqualified deferred contribution plans, cash-value life insurance plans, and real estate investment.

Guaranteed income annuities shouldn’t miss from this list of your possible retirement savings options. Read on to learn more about how you can save for retirement using fixed annuities.

What Are Annuities?

In simple terms, annuities are fixed sums of money paid to you periodically for the rest of your life. You first need to deposit money with an insurance company, either in lumpsum or in spread-out instalments. 

When the time specified in the contract reaches, you can start receiving monthly, quarterly, or annual payments for the rest of your life.

Variable VS Fixed Annuities

For variable annuities, the payouts you receive depend on how your selected subaccounts perform. Subaccounts are usually stock and bond products. Tying annuities to such financial assets is both advantageous and disadvantageous for you.

In case the stocks and bonds perform well, your payouts increase. But, the risk comes when your selected products underperform. Your payouts may end up being less than is enough to meet your day-to-day financial needs.

To avoid such pitfalls, you can opt for a fixed rate annuity. This guarantees you a fixed amount of retirement income as long as you live. You can choose to be paid monthly, quarterly, or yearly.

Fixed Annuity Deposit And Payout Options

Fixed annuities can further be classified into two types in respect to how you deposit your money. These are:

  1. Immediate Annuities: This is where you deposit a lumpsum of money with the insurance company and immediately start receiving payouts. Consider a scenario where you get a sizeable inheritance from your parents, you win a jackpot, or you sell your business. It’s a great idea to deposit all this cash into your insurer’s account, and then be guaranteed of fixed payouts every month. With this type, you can start receiving the payouts immediately.
  2. Deferred Annuities: For this second type, you specify a date in the future when you’d want to start receiving the payouts. Say you’re 40 years now—you can make monthly deposits to your insurer until you hit your retirement age. From then, henceforth, you’ll be receiving a fixed monthly income from the insurance firm. Remember, you can still combine the monthly deposits with lumpsums of money whenever you come across such. 

Are Fixed Annuities Taxable?

Taxes are a common worry when choosing retirement savings plans. Usually, the less taxes you pay, the better for you. Better still is if you can entirely evade taxation.

For fixed annuities, you can choose the qualified annuity option so that your savings aren’t taxed for the whole period you’ll be making deposits. But, once you start receiving the payouts, you’ll be taxed at your usual income tax rate.  That should not be much of a worry if you’re in a low-income tax bracket.

If you choose the non-qualified annuities option, your contributions will be taxed as you deposit money. But, when you start receiving your payouts, no tax will be levied on the withdrawals.

Can Fixed Annuity Payouts Exceed The Deposits?

Yes, certainly. If you live for a considerably long time after retirement, the total payouts you receive may exceed the deposits you made. However, if you die soon after retirement, the insurance company will keep any remaining fund in your annuity contract. This is one of the ways insurers make money, on top of annuity fees and management services.

Even so, there are other options, like joint and survivor annuity, which allows your spouse to continue receiving payouts after your death. Another option is to go for annuities with a guaranteed number of payout years. If you pass away before these years elapse, your beneficiaries will start receiving the payouts until the agreed-on period expires.

Conclusion

Fixed annuities are a great retirement savings option. It gives you great peace of mind to know that you’ll be having a constant monthly income after retirement. Even though the payouts remain fixed even with inflation, it’s better than having nothing at all to live on after you stop actively working.