Should a retirement-annuity be part of your income plan?

A retirement-annuity could close the gap between what you have and what you need. It could also provide some assurance that you won’t outlive your assets. If you are already retired or close to it and your income is short of your budgeted need, an immediate retirement-annuity could be a solution for consideration.

Much like a reverse mortgage, the amount of the monthly payout from an annuity will be based on your age and prevailing interest rates. Most immediate annuities provide a fixed lifetime income and can be designed to provide that income for the longest surviving spouse. They can also be written with a cost of living adjustment, a feature that would certainly increase the cost.

Considering continuing inflation and advances in healthcare, outliving retirement savings is becoming more and more likely for the average American. Immediate annuities are one of the few investment vehicles that can guarantee a lifetime income.

Whether or not an annuity is a good investment is subject to discussion but that is not the purpose of this site. An immediate annuity is an appropriate option for a retiree who needs consistent monthly income to close the gap between what they have and what they need.

A retirement-annuity is an insurance product that is most generally marketed by insurance companies. There are, however religious and charitable not-for-profit organizations that market annuities as well. The important thing is to be sure that the annuity is backed by a financially strong entity.

The principal invested in your immediate annuity will grow at a fixed rate while you take your payouts. Each payout is comprised of both principal and interest. The principal portion is generally not taxable but the interest is taxable. The benefit is the assurance that your income will continue for your lifetime and the downside is that when you die your investment is gone. It is important to discuss with your financial consultant and tax advisor before making a final decision on the purchase of any annuity.

Other things to consider are:

  • Remember that annuity income is subject to federal and state taxation. Be sure to consult with your tax advisor.
  • Keep an emergency fund on hand. Your access to funds in the plan will be limited. Depending on your circumstances, you should plan on investing no more than 40 to 50 percent of your assets excluding your home in an annuity.
  • Review source of funds intended to the investment. Are there any penalties or fees involved with withdrawing the funds?

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