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Retirement: Annuities-Fixed and Variables
 

Annuities

Annuities provide a steady retirement income that you can't outlive — that's the goal for all retirees.

TYPES OF ANNUITIES  

Immediate or Deferred? With an immediate annuity, the owner makes one lump–sum premium payment and
begins to receive cash immediately. This is for people who need immediate income from their annuity. With an immediate annuity you can choose how long you would like to receive payments. Typically options vary from 5–20 years and life and or your surviving spouse's life (see below).

Deferred annuities are the most popular for people who are still saving for retirement. They are called deferred annuities because payments are deferred until a future date. Also the tax on the investment gain within the annuity is deferred until you begin to receive payments. This means that the amount can grow faster, due to the tremendous power of compound interest. .

Fixed
Fixed annuities guarantee a stream of fixed payments over the life of the annuity. The insurer or issuing company takes the investment risk. Fixed annuities are viewed as secure investments by many people because the insurance company usually invests the money in government securities and high–grade corporate bonds. Fixed annuities offer a minimum guaranteed rate of return. Note it is not unusual for companies to offer a higher initial interest rate for a specified number of years and then a new rate, in the subsequent years. The rate is fixed usually for only one year at a time and is based on investment results.

TIPS FOR ANNUITY BUYERS
 
1.
  Understand How an Annuity Works — the easiest way to understand an annuity to is to think of it as the opposite of life insurance. It pays when you are alive; life insurance pays when you die. More formally, an annuity is a contract between you (the annuitant) and the issuer, usually an insurance company. You give the issuer money in either a lump sum or through regular payments. The interest your money earns accumulates on a tax–deferred basis and then, at a specified date, you begin to receive payment(s), either a lump sum or at regular intervals (e.g. monthly) for a specified period of time, usually between 5 –20 years or for life. Unlike many qualified retirement savings vehicles, there is no limit to how much you can invest in an annuity. In most cases, you cannot withdraw the money in an annuity before age 59½ without incurring penalty fees from both the IRS and the insurance company (see below). When you begin to receive annuity payments, it is time to pay the taxes that have been deferred.
   
2.
  Determine If an Annuity is Right for You — while tax deferral makes annuities attractive, they are usually not the first option in a retirement plan. Consider purchasing an annuity only after you have fully funded your IRA, 401(k) or 403(b) plan for the year. These investments use pre– tax money and is the first step in long– term retirement planning. If you have additional funds to invest, annuities, along with mutual funds, bonds and stocks may be an option. All of these can be present in a well rounded retirement plan.

If having immediate access to your money is important, an annuity is probably not the right choice. If, however, you have extra liquidity and a long–term savings goal, the benefits of tax–deferred growth could make an annuity an excellent choice.

Also consider an annuity if you have received:
  • A lump sum from a pension plan
• An inheritance or
• Money from the sale of a home or business.
    The best way to determine if an annuity fits your situation is to sit down and discuss
your goals with a trusted financial professional.
   
3.
  Understand the Payout Options and Surrender Charges
There are five basic payout options for all annuities, they are:

   
1.
Life Only: This option pays the most for each dollar of premium paid into theannuity. Payments however are made only until your death. Payments stop when you die. If you die before the payment of all funds, the company keeps the excess.
   
2.
Certain and Life: Payments made for a predetermined time usually between 5 and 20 years. This is called the period certain. If you die before this period expires, your beneficiary receives payments until the end of the period. If you live beyond this time, payments continue until your death.
 
3.
Fixed Period: Under this payout method, the company guarantees payments for the number of years specified in the contract, again usually 10 or 20 years. If you die before the specified number of years, the company pays the remainder to your beneficiary or your estate.
 
4.
Fixed Amount: You receive payments until the funds are exhausted. If you die before all funds are paid out, the remaining proceeds are paid to your beneficiary or estate in a lump sum.
 
5.
Joint and Last Survivor: This plan makes payments as long as the two people named in the policy are alive. When one dies, the amount of payment may be reduced according to the terms of the contract.
     
4.
  Know Your Risk Tolerance — Risk tolerance, simply put, is the answer to the question, "How much of your investment are you willing to put at risk (i.e. lose) in order to possibly receive a higher return. If your answer is "none," you have a very low risk tolerance and should probably seek out an annuity with a guaranteed fixed interest rate.
     
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Phone : (718) 674-2291 E-mail: info@gospichadvisors.com