There are several advantages that an annuity can give you during your retirement. Firstly, rather than the fluctuations associated with investing—both from changing interest rates and welfare of the company you’re invested in—an annuity guarantees a set stream of income for life. This is beneficial to any retirement plan, ensuring a steady income that a retiree can budget around.
Secondly, an annuity can offer some tax advantages. The payments from an annuity can sometimes be taxed as a lower capital gains rate, making an annuity an attractive option for those of us looking to minimize our tax liability.
Finally, an annuity can aid you in planning your estates. By naming a beneficiary, the policy holder can ensure that their annuity payments will continue to go to whomever they choose after their death.
Look below to learn more with part 9 of the series on retirement planning.
Once you’re starting to take it out or annuities, which is where it gets its name, that paycheck will come to you on a regular basis. It will never go up. It will never go down. It’s not affected by interest rates or the stock market. You’ll receive that paycheck until the day you die and possibly past.
So, the real advantage of that vehicle is to save tax deferred and give yourself a steady stream of income in retirement.
What many people do is invest their money in all kinds of investments and then live off that income in retirement. The problem with investments is they fluctuate with the underlying value of a stock, for example, or if it’s tied to an interest rate, interest rates go up and down.
So, if I had my money in the bank and I was living off a fixed interest rate and interest rates go up and down, my paycheck now goes up and down.
With the annuity, it’s a regular exact paycheck that comes — not a paycheck, but it’s your own savings coming back out, and you get to choose for how long that is.
For more answers to common retirement planning questions, check out the rest of the Question Mark: Retirement Planning series.