Annuities are contracts with insurance companies used for retirement planning. Annuities can ensure scheduled payments to you during retirement so you have a steady income. Or, if you do need an income stream, you can have the entire annuity balance paid in a lump sum upon retirement. Just as with other retirement accounts, taxes on annuity growth and interest are tax-deferred until retirement. Banks, brokerage houses, financial planners and insurance agents all are capable of setting up an annuity for you.
Starting an annuity begins with clearly defined goals. Your desired retirement lifestyle and the amount of savings needed to finance it helps you choose the most valuable annuity product for you. You can make a one-time deposit into an annuity or make an initial investment and additional contributions over time to reach your goals. Factoring in your investment timeline also is important in determining the required investment growth for setting and meeting your goals.
Investing in an annuity includes examining your risk appetite. Younger investors are more commonly open to riskier, growth opportunities like the stock market. Variable annuities offer investment options like mutual funds, which are baskets of stocks. They can provide opportunities to keep pace with the cost of inflation. People closer to retirement lack the time horizon to ride out market volatility, so they may take more conservative approaches, such as fixed-interest or government bond annuities.
Costs and Early Withdrawals
Costs and rules for withdrawals are important factors when considering annuities. If you withdraw money before age 59 1/2 the government assesses a 10 percent early withdraw penalty along with income tax on annuity earnings. Your annuity terms may also include surrender charges to the insurance company for early withdrawal. Your bank, brokerage house or financial planner may also charge you commissions on annuity sales. Buying direct from the issuing insurance company may save you a commission.
Monitor the Progress
Regularly monitoring your annuity is part of a successful retirement strategy. Your goals may change, requiring modifications to your plan. Your income may increase, allowing you to invest more and outperform your goals. Remaining nimble also allows an investor to make changes to an annuity if it under-performs investment goals. For example, you and your financial planner may decide to change mutual funds or roll a fixed annuity into something with a greater return.
- An annuity is not a risk-free investment. Make sure to research offerings from a number of insurance companies prior to investing.
- Investing in annuities is complex. Talk to a financial advisor with experience with annuities once you have done your research to ensure that you are aware of all aspects of the annuity you want to invest in.
Maggie Lourdes is a full-time attorney in southeast Michigan. She teaches law at Cleary University in Ann Arbor and online for National University in San Diego. Her writing has been featured in "Realtor Magazine," the N.Y. State Bar's "Health Law Journal," "Oakland County Legal News," "Michigan Probate & Estate Planning Journal," "Eye Spy Magazine" and "Surplus Today" magazine.