One of the greatest fears many retirees face is the fear of outliving their retirement money. To relieve this fear, some retirees turn to fixed annuities with lifetime payout options, which can provide a regular stream of retirement money that is guaranteed for life.
Some retirees choose to purchase a fixed annuity with a lump-sum distribution from a retirement plan. But you should not overlook the alternative of funding these retirement income vehicles with periodic premium payments. In fact, if you have other financial goals, such as leaving a monetary legacy to your heirs, regular payments into these types of annuities could help you to satisfy your financial needs.
Here's how it could work: a married couple who has just reached retirement age wants to draw enough retirement money from their savings to supplement their Social Security income. They also wish to leave a substantial portion of their assets to their children and grandchildren upon their death. They could choose to live off of investment income and periodic withdrawals from their retirement money for a number of years, then purchase a fixed immediate annuity with lifetime payout option at the last possible moment. This strategy could provide sufficient income for the rest of their lives. However, the couple might not have the assets they would like to pass along to their heirs.
Instead, the couple could choose to invest regularly into a fixed deferred annuity that would make lifetime payments. Their retirement income needs could potentially be met with two reliable sources- the annuity and Social Security. Other retirement money the couple owns can be invested for long-term growth, to help build enough wealth to pass along to their children and grandchildren, or, the remaining assets could be used for other financial needs, such as purchasing life or long-term care insurance policies.
Fixed annuities can provide the annuity owner with a predictable stream of retirement money to meet daily living expenses. These payments can last for a period of years or, as previously mentioned, can be paid out over a lifetime or even the joint-lifetimes of a husband and wife. With fixed annuities, most companies also offer interest rate guarantees, which vary from company to company. The initial guaranteed rate will typically vary according to the company involved and the duration of the contract. Some companies offer increases in the interest rate for premium payments above a certain amount.
The retirement income payments of a fixed annuity could begin immediately, or can be deferred until a certain date in the future. An annuity that provides retirement money at a date in the future is known as a deferred annuity. With an immediate annuity, however, payments begin immediately after the premium payment is made. Cash flow payments from an immediate annuity can be higher than what is offered through a deferred annuity. However, the sacrifice is that the unpaid account balance is typically forfeited in the event of a premature death. Your decision to purchase a deferred or immediate annuity will depend upon the time horizon for your retirement money (e.g. life expectancy), your anticipated income needs during retirement, and your liquidity needs.
Fixed annuities are long-term investments designed for retirement purposes. Withdrawals of taxable amounts are subject to income tax and, if taken prior to age 59½, a 10% federal tax penalty may apply. Early withdrawals may be subject to surrender charges. Annuity guarantees are backed by the claims-paying ability of the issuer.
While fixed annuities may not be for everyone, they are worth a look if you are searching for a reliable source of retirement money that could last throughout your retirement.