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  An Income from an Annuity Can't be Outlived  

Retirement Plans Use Annuities to Provide Income Until Death

Only an insurance Annuity can guarantee to pay for a lifetime, no matter how long that lifetime lasts.  A bank can pay only for a stated number of years. Insurance annuities create a pool, using an average lifetime and fund to pay for every annuitant. Unused payments intended for early die-ers are then forwarded to the long live-ers. There are safety choices available, but these guarantees do reduce the payments from the lifetime, no-period certain choice.

  • Period-Certain - The annuitant collects for life, but a beneficiary would receive the balance of the chosen minimum number of payments.

  • Cash Back - The annuitant collects for life, but payments must continue to a beneficiary until the total contribution has been received.

  • Joint - Life and Survivor Income - Provides a level of income while a couple lives, then reduces after either death, for the lifetime of the survivor.

One couple was concerned about the care of their brain-damaged daughter after their deaths. Each parent bought an annuity with her lifetime care as the “survivor”.   A May-December marriage used an annuity (funded by life insurance) for the much younger wife, to provide a monthly income for her lifetime. Any gigolo conning her out of her assets would only succeed for that month. She would receive another payment on the first of the next month, remaining financially secure.  All annuities use the same funding vehicle to accumulate contributions. Contributions can come from regular payments made each month over a lifetime. A large contribution can come from anywhere; a 401 (k) retirement, and IRA rollover, an inheritance, or a cashed-in a stock. Tax-Qualified annuities have maximum yearly contribution limits, so larger deposits may need to be split between them and a Tax Non-qualified annuity.

There are different types of annuities:

1.  Immediate Annuity – the first income payment begins within 30-days of purchase

2.  Deferred Annuity – the first income payment begins over 30-days from purchase

3.  Tax Non-Qualified Annuity – contributions do not give a tax deduction

4. Tax-Qualified Annuity – may give a tax deduction for the year of contribution (see a tax professional)Tax-Qualifieds are further broken into:

5.  ROTH IRA (contributions were income taxed, but the interest will never be taxed. The account is allowed to accumulate past age 70½).

6.  Traditional IRA (contributions are tax deferred, listed as a credit on line 32 of the IRS Form 1040. The account accumulates tax deferred but withdrawals are taxed. The hope is that the tax bracket is lower after retirement than when the contribution was made. Withdrawals must begin by age 70½.)

7.  Fixed Annuity – The account earns investment results, like any interest-bearing account. Most fixed annuities pay at least a guaranteed minimum return (interest), no matter how bad the economy is. The value can never be less than the sum of the contributions.

8.  Variable Annuity – Each contribution purchases units at the current rate, much like when buying stocks. The entire number of units is worth whatever the rate becomes. The rate may vary to less than the purchase rate.

Annuities are useful in two situations.

A large amount of cash needs to be safely held for the future, without becoming taxed first. An insurance annuity grows while deferring any income taxes. They are secure. (the ‘I’ in FDIC is insurance.) Less than 5% of life insurance vanished during the Great Depression of the 1930s. There is time to refine a plan for the large fund, as all available options remain open until one is chosen and withdrawals begin. The account is accessible at any time, although some early-withdrawal penalties may apply until age 60.

A steady stream of additional income will be needed. A retirement calculator can assist in determining how large an income will be provided by Social Security, Pension, Cash-value Life Insurance, investments and existing savings. But that is rarely large enough for the rest of a lifetime. Once the shortage is calculated, an annuity can project the monthly contributions necessary to achieve the desired income.

A little fiscal deprivation now is worth sending money into the future.  Small, regular contributions can grow into an amazing fund, when given time. An annuity is an effective financial conduit between a young person and their aged self.

Learn more about annuities on our site or to get a free consultation visit our online annuity form

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