Money is better than poverty, if only for financial reasons.
As the quote above says, money is better than poverty. But you're not destined for poverty since you're reading a page on annuities, one of the smartest financial planning tools on the market. If you've made it this far, chances are you're looking for a smart way to shore up your retirement. And guess what? You've found it.
Here's what an annuity offers:
- Guaranteed income for life
- Reduced exposure to risks such as longevity, inflation, and market volatility
- Supplement for pensions, 401(k)s, and Social Security
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Now that you know how an annuity can protect you from market volatility and inflation, let's dig a little deeper into the facts.
Is an annuity the same thing as a pension?
Yes and no. Annuities and pensions are the only two financial products that offer guaranteed income for life. Here how an annuity works:
An annuity is a form of insurance that functions as an investment, in which you pay into the annuity until retirement, then the money is returned to you in payments until you pass away, amounting to "guaranteed income for life."
The key difference is that a pension is controlled and distributed by an employer, while you own your annuity. With governments and private employers slashing pensions to stay afloat, you can't count on this type of income to last forever.
Why haven't I heard about this before?
Annuities aren't as well known as more popular financial planning strategies, such as 401(k)s or Roth IRAs.
That should change soon, thanks to a 2011 report by the Government Accountability Office—they're the ones in charge of stopping wasteful government spending. In the report, the GAO urges seniors and those nearing retirement age to strongly consider converting some of their savings or their pensions into annuities. Lots of other Americans agree. In fact, 1 in 5 Americans uses an annuity for retirement income!
We all know that Social Security was never implemented to provide all of a person's retirement income, and the GAO is now suggesting that you consider creating a lifetime income stream with either some or all of your retirement lump sum.
How does an annuity handle market volatility?
Annuities can handle market volatility more easily than other financial products. Many retirees rely on the stock market to support their retirement income, often investing in a combination of mutual funds and individual stocks of their own choosing. But if this is your strategy, be careful.
According to the Denver Post, the recent recession cost Americans 25% of our overall wealth. How would your retirement account look if it were slashed by 25%?
Although the stock market has allowed retirees to gain back some of what they lost, their day-to-day fortunes still fluctuate at the whim of electronic trading networks that buy and sell enormous amounts of shares every day.
The problem with a strategy dependent on stocks and mutual funds is that they rely on Wall Street to do well. But as we've all learned, Wall Street gets hammered from time to time, and we're the ones who pay the price. Isn't there a smarter way to go about it? The GAO thinks so—and we do, too.
Do annuities really provide guaranteed income?
An annuity is a financial tool offered by life insurance companies. When you buy one, you make a monthly payment to your insurer. This money goes into an escrow account, just like it would if you bought a life insurance policy. When the annuity reaches the end of its accumulation period, the process reverses. Now, your insurer starts paying you every month. It's your money, coming back to you in regular intervals that will never stop and never decrease.
How's that for worry-free retirement income?
Are there different kinds of annuities?
The two basic types of annuities are immediate annuities and deferred annuities.
- With an immediate annuity, the payments from the life insurance company begin right away. To get it started, you need to make a large lump-sum payment. This works for people who want to convert a portion of their savings or an existing lump-sum pension payout into a more secure form of income.
- With a deferred annuity, you're required to pay into the annuity for a certain amount of time before the payments start coming to you. There are interesting investment options with a deferred annuity, as well as tax savings. The money you invest is allowed to grow tax-deferred. When you start receiving your payments, you won't be taxed on the money you contributed—you'll only be taxed on the earnings (such as interest, or investment profit).
How do I apply?
Call us! We'll answer your questions and give you step-by-step help during the application process. Reach us Monday through Friday, 8 am to 5 pm (Pacific time) at 800-823-4852.
Government Accountability Office (GAO): Retirement Income
LIMRA: The Facts of Life and Annuities
Denver Post: Americans Closer to Regaining Wealth They Lost in Great Recession