How much should I invest in an annuity?
The amount of money that you invest in an annuity will depend largely on your capability to pay the premiums offered by the assurance company. Things to consider when putting money into an annuity include:
– Your probable financial needs
– Type of investment portfolio
– Alternatives available
The most important thing to consider is your financial needs, especially when you need cash to finance something like the birth of a child delivery or an unforeseen accident or illness. However, you must also consider the regulations on withdrawal against the annuity because it can be a bad scenario if you find yourself being served a penalty just because you withdrew large amounts from your annuity account when it was not permitted on the plan you purchased.
What is a deferred annuity?
A deferred annuity pays out to investors interested in income from an annuity but who want the payments to begin sometime in the future, usually at retirement. Or they may want the insurance company to invest the money for a few years to increase the payments. A tax-deferred annuity allows income tax to be deferred until the money is withdrawn, and you can contribute as much money yearly as you like.
What is an immediate annuity?
An immediate annuity is an investment policy usually purchased from an insurance company. Immediate Annuities are sometimes known as Single Premium Immediate Annuities. Immediate annuities are commonly purchased with a lump sum and used as a retirement investment. In an immediate annuity, the investor begins to receive lump-sum payouts anywhere from immediately to one year from the date of purchase. Generally, payments begin one month after investing in the annuity.
Immediate annuities can be fixed or variable. While a fixed immediate annuity payment depends on the amount you contributed, your age, and the interest rate at the time or purchase, a variable immediate annuity depends on the type of investment purchased.
There are various options available to you when purchasing an immediate annuity. You can decide whether you would like a set period of payments or a lifetime of payments. You can also decide whether the payments are solely for the person who holds the policy or for a secondary person, such as a spouse.
What are the advantages of annuities?
There are three principal advantages to an annuity:
- Tax-deferred accumulation. This allows you to set aside the funds you pay into the annuity for as long as possible without worrying about exceeding federal tax limits.
- Flexibility. An annuity can offer you a variable or a fixed return, unencumbered by federal tax limitations.
- Security. An annuity offers a fixed-income payout option which would grant an income that cannot be outlived.
How will I receive my annuity payments?
There are several payout methods available when you begin receiving annuity payments. You or your beneficiaries can select how you want to be paid with some options. The following are some of these:
You can get income for your entire lifetime even when the money in your annuity account has been used up. This is advantageous if you live to an advanced age because it will maximize the income that you will receive. However, a risk is involved: when you die, all the money cannot be claimed, even by your assigned beneficiaries. If you die young, you lose this money.
Another is the joint and survivor annuity, which pays you during your lifetime. After your death, your beneficiary (usually your spouse) will also be paid during their lifetime.
You can also refund your annuity, meaning you’re gaining income for life. However, when you die, the portion of the income payments you have not collected will be the only amount your beneficiary receives. For more on how to use annuities in retirement click HERE.
If you have any questions concerning annuities feel free to contact me directly. Annuities are some of the most complex financial instruments available to you and you can get my book on annuities HERE. It is imperative that you know and understand what you are buying. If you are in or near the Metro-Nashville area and have questions reach out to me. If you are outside Tennessee, feel free to contact me or another qualified fee-only Registered Financial Consultant near you.
