Greetings! I trust that this finds you well and enjoying life.
For several weeks now we’ve been examining common retirement income strategies. For most of us in retirement financial security is predicated on stable, reliable income. We’ve examined the methods of taking a stated withdrawal or spend down rate from a diversified portfolio as well as using dividend generators such as REIT’s or dividend paying stocks and interest bearing bonds. Today let’s consider using annuities for retirement income.
When you utilize an annuity for income you transfer the responsibility, management and administration of your money to an insurance company. Today’s retiree has available to them three different forms of annuities which are fixed annuities, equity index annuities and variable annuities. All are unique in the methods they use to manage your money and have features and benefits that appeal and pertain to some retirees but not to others. You’ll want to understand those differences before you choose which is best for your situation.
The fundamental value behind annuities for retirement income is that they provide income payments for life. Once you turn on that income stream if you choose a lifetime payout, you can’t outlive that portion of your money. It’s possible to spend down portfolio type assets such as stocks or bonds or lose them to market conditions, but annuity payments are guaranteed by the insurance company. In a sense when you use an income annuity you pensionize a portion of your assets for guaranteed income payments such as a pension provides.
The types of annuities listed above provide payout options that range from maintaining control of your principal and thereby receiving reduced payments, to giving up your principal entirely (annuitization) for a greater lifetime income payout. You’ll want to understand those options before you choose which is best for your situation.
Recently the IRS introduced a feature that applies to IRA accounts and annuities that may be of value for you in your retirement income planning. It’s called a Qualified Longevity Annuity Contract (QLAC). Recognizing the fact that medical science has and is taking great strides in keeping us alive longer and thereby a heightened concern about people outliving their money, the IRS allows up to $125,000 of an IRA to be invested in a QLAC annuity and that portion of the IRA is not subject to required minimum distributions at age seventy and a half. The annuity is one that is structured to be purchased at a discounted premium at a younger age say sixty, with the intention of foregoing payments until an older age say for instance age seventy five, and then receiving lifetime income thereafter. In certain cases these can provide needed security at a discount, compared to other income producing methods. Not having to take required minimum distributions is a big factor in the ultimate payout of a QLAC.
Annuities are gaining popularity for retirement income because of their reliability and ease of management. They may or may not be an appropriate fit for you. A thorough investigation of annuities as well other methods of providing retirement income will help you to determine what’s right for you. Remember, that knowledge is power.
If you have questions about retirement income or anything else pertaining to retirement don’t hesitate to contact us.
Jeff Christian CFP, CRPC