Are you a Baby Boomer who is about to retire or maybe you have recently retired? Regardless, you are most likely looking at your golden years and wondering do I have enough money to last me in my retirement? I am hoping you have investments in IRA’s, 401(k)’s or a brokerage account to help get you through these years in comfort. Chances are you may or may not have a pension that you will collect as you seem to be about the last generation that will have this luxury. And of course you will be collecting Social Security if you are at least age 62 and opted for early payments. Now what do you do if your expenses are greater than your new monthly income? One answer may be an annuity.
Depending on the amount of money you need to make up and for how long you will need the payments will determine what kind of annuity you will need to buy and how much you will need to initially invest. Buying immediate annuities right now with interest rates at historic lows may not be your best option but regardless it is an option if you are already retired or will retire very soon. An example is of you invested $100,000 in an immediate annuity you would receive about $6,900 annually for the rest of your life. However, if you had purchased the same annuity at age 60 and deferred any payments until age 65 you would receive about $8,700 annually for the rest of your life. In that example you will get a $1,800 a year benefit for just five years of deferring payments and letting the money earn interest with the life insurance company. Now think of what the payments would be if you could invest the same $100,000 as early as age 50? That would be equal to a good piece of a replacement income for you for the rest of your life. But there is no law stating you have to fund an annuity with a lump sum and if you plan according and start early in your working years you can accumulate a large nest egg that will pay you on an annual basis in your retirement years.
Also there is no rule that you have to start taking your payments at age 65 and you could defer the payments until age 70 or 75 when you think you will have depleted a good portion of your investments and will have a greater need for the additional income. The only exception is if you have an annuity in an IRA account you are required to start taking payments at age 70 ½ or face a penalty. Now if you defer payments until later in your life you will see a dramatic increase in your annual payments because your life expectancy will be shorter than if you started at age 65. But here you run the risk of not living long enough to recoup the money you invested.
Now if you are married or want to leave the payments to your heir or heirs you have this option as well but the monthly payments will be reduced some. In the event that the annuity is left to an heir other than your spouse the payments are generally limited to a specific number of years. Several years ago life insurance companies introduced “longevity insurance” which began payments at age 80 or 85 with high annual payments because the insurance companies figured you were not going to live that much longer. And people took the risk and invested in these accounts with an all or nothing approach with the chance they could die before payments actually began. Now most companies will allow you to defer payments anywhere from two to 40 years again with the idea the longer you defer the higher your annual payment will be. Now some policies will allow you to change when you elect to receive payments once and most all policies build cash value.
Now you may be asking what are the tax consequences of an annuity? I am not a tax specialist and these are general ideas so always check with a tax specialist for your particular tax needs. But as a general rule unless your annuity is in a ROTH IRA there are some tax consequences to your payments. As most annuities are paid for with after tax dollars a portion of the annuity payment will be tax free as the taxes have already been paid for on that portion of the payment. Any portion of the payment that is not from your principal investment will be taxed as ordinary income for the recipient. Now if you outlive your principal in the annuity the entire payment will be considered ordinary income for tax purposes. If you decided to cancel the annuity and take your cash value any principal in the cash value is not taxed while any interest accumulated and paid to you will be taxed as ordinary income provided you are older than 59 ½.
