Relying on Social Security or pension income isn’t wise for anyone. Social Security isn’t guaranteed, and just about a quarter of Americans have a pension today. If you haven’t saved for retirement or worry there will be a gap in your income and financial needs; an annuity can bridge the gap.
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Want to know the best part?
Annuities have tax benefits similar to your tax-deferred retirement accounts (401K or IRA). They are another tool in your personal finance toolbox helping you through retirement.
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What are Annuities?
Annuities are insurance contracts guaranteeing regular payments during retirement. You can buy an immediate annuity, earning income right away or within 12 months, or tax-deferred annuities that provide an income stream at some point in the future, helping to offset unexpected expenses or providing you with an emergency fund in your senior years.
The best annuities for retirement income are those that cover you for the duration of your life expectancy.
What Type of Annuity is Best for Retirement?
Just like any personal finance tool, annuities aren’t a one-size-fits-all approach. The best annuities for retirees are the annuities that fit your financial needs.
Here’s the deal:
Immediate annuities, as the name suggests, pay you right away, typically within 12 months. You can spread out payments however you see fit. You choose the payment frequency duration. Choose from:
- Payments over one or two lives
- Guaranteed payments for life
- Beneficiary protection paying your beneficiaries any money not paid out to you yet
The way you structure the annuity determines its cost and interest rate. You can choose from a fixed annuity, annually adjusted for inflation annuity, or varied (based on the performance of the investments).
Deferred annuities don’t pay out right away. They are typically deferred for at least 5 years. You contribute your premiums, and the money grows tax-deferred while you aren’t taking withdrawals.
But watch out for your tax liabilities.
Here’s the thing – most people don’t realize the tax liability annuities create. Since they are income, a portion of your annuity payments may be taxable. In some cases, the entire amount is taxable.
It’s best to get with your tax advisor before choosing an annuity to ensure it won’t pose a serious tax liability.
Here’s how annuities are taxed:
- Non-qualified annuities – These are purchased with after-tax money. You won’t pay taxes on any of the money used to buy the annuity, but you will owe taxes on the interest earned.
- Qualified annuities – These are purchased with pre-tax dollars, and the income from the annuity is 100% taxable, increasing your taxable income for the year.
Are Annuities a Good Investment for Seniors?
This leads us to the question – are annuities a good investment for seniors?
If there’s a chance you’ll increase your tax liability, is your 80s or any time during retirement a good time for it?
Then there’s the worry that you won’t live long enough to use the annuity.
If you die prematurely, you will likely lose your investment unless you set it up for payments over two lives (you and your spouse) or with beneficiary protection, paying your beneficiaries the premiums you paid into it.
Suppose you’re a senior without a retirement fund or who worries about not having enough money from your retirement funds and potential Social Security payments. In that case, an annuity could bridge the gap. It’s a gamble, too, though.
Annuities don’t work like life insurance.
If you die – your loved ones don’t get your annuity. But, if you have life insurance, including final expense insurance, which is great life insurance for seniors over 80, your beneficiaries receive the payout when you die.
Annuities can be a good investment if you’re set in all other aspects of your retirement planning and have extra money to invest. Otherwise, setting yourself up with a proper retirement fund, life insurance plan, and the emergency fund should be the priority.
Should an 80-year-old Buy an Annuity?
Ideally, an 80-year-old would have his/her retirement account set and wouldn’t have to worry about buying an annuity. Instead, he/she could focus the money on setting her loved ones up for his/her death. Buying life insurance is often a better investment than buying an annuity once you’re 80-years old or older.
But, if you don’t have retirement savings or your expenses are higher than you planned in retirement, an annuity (especially an immediate annuity) can provide payouts immediately, giving you more cash flow and easing your stress during your golden years.
Can you Lose your Money in an Annuity?
Fixed annuities don’t lose money. They have a fixed rate of return and don’t risk your principal.
But you might be wondering about variable annuities.
Variable annuities have higher payouts, typically because they are based on their underlying investment. But this means a higher risk of loss. There’s no guarantee a variable annuity will hold its value.
This means you could walk away with nothing after investing in an annuity, so yes, you could lose your money in an annuity.
So, what’s the bottom line?
Should you invest in an annuity or stick your money in a retirement fund?
There’s no right or wrong answer. Instead, look at the big picture. Do you have retirement funds separate from Social Security? Do you have a reserve fund for those unexpected expenses?
If you don’t have either, an annuity for seniors may be a good option. It will fill in the gap and help you get through your senior years without too much stress.
If you’re set on retirement funds, and you have savings, you’re better off focusing on life insurance and setting up your beneficiaries for when you pass away. It’s not a pleasant thought, but it’s life, and the sooner you focus on protecting your loved ones, the more money they’ll have to handle your final expenses without financial stress.