An annuity is a financial product that delivers what sounds too good to be true: guaranteed income for life. Luckily, annuities are a very real source of retirement income that help ensure you don't outlive your savings.
What makes annuities so attractive to so many? Safety, security, and dependability. To see how they provide this, let’s start by taking a closer look at traditional sources of retirement funding.
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Schedule a CallThe Problem: Traditional Retirement Funding Isn’t Secure
Many people expect to pay for retirement with a combination of the following:
- Pensions. Unfortunately, pensions are few and far between, since so few employers offer them anymore. In fact, as of 2020, only 15% of private employers offered them.* Even worse, some public sector pensions are getting slashed as a result of bankruptcies and spending cuts. So if you’re lucky enough to have a pension now, be aware that your benefits may be cut in the future. The good news? An annuity can replace a pension.
- Social Security benefits. Despite its name, Social Security is anything but secure. According to current predictions, Social Security is projected to be insolvent no later than 2035; at that point, it will likely have enough cash to cover about 77% of its financial obligations.** The only solution would be to cut benefits, raise taxes, or both. So while the program is likely to remain available, there’s no telling how much cash it will actually be able to provide you with by the time you need it.
- Traditional retirement accounts, like a 401(k) or IRA. We’ve all seen how dramatic drops in the market can affect retirement accounts like a 401(k) or IRA. In 2022, for example, the S&P 500 posted its worst loss since 2008, losing 19.4% of its total value.^ If you’re in or near retirement, how are you supposed to cope with losses like that?
- Personal retirement savings. If you’re like most Americans, your savings wouldn’t last very long if you had to live off them. As of 2022, the median savings account balance for Americans age 55-64 is $6,400.^^
The bottom line: you’re probably going to need a safer, more stable alternative for retirement income. That’s exactly why more people are turning to a fixed income annuity.
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Schedule a CallThe Solution: A Guaranteed Income Annuity
Annuities have a huge advantage over the other types of retirement funding discussed above. They provide guaranteed lifetime income. When you buy an annuity from a life insurance company, you either:
- pay for it all at once with a lump sum of cash (immediate income annuity)
- pay into it over a period of time with regular payments (deferred income annuity)
In both cases, the insurance company invest your money and pays you a guaranteed rate of interest. That rate will be spelled out in your contract when you buy the annuity. Your money is guaranteed to grow over time.
When it’s time for you to retire, you can elect to start receiving your annuity income. You can pick an annuity that’s designed to accumulate for anywhere from 0 to 30 years. It all depends on the length of time until you anticipate retiring or needing that annuity income. Then, the insurance company pays you on a regular basis until the day you pass away. There’s no running out of money – ever. They keep paying as long as you live.
No matter what the stock market has done, your annuity will pay.
No matter how much your Social Security benefits include, your annuity will pay.
That’s why it’s a safe, secure choice for retirement income you can’t outlive. No other financial product provides the peace of mind during retirement that an annuity can.
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Schedule a CallRetirement Planning Tax Advantages
There's also a key tax advantage to owning an annuity. If you buy your annuity with after-tax dollars – the most common strategy – you can take advantage of this little-known benefit.
The money in your annuity will grow at a set rate of interest specified when you bought the annuity. It’s completely non-taxable until you start taking it out during retirement. At that point, you only have to pay tax on the interest earned during your annuity’s accumulation phase. You have the chance to grow your money for years, absolutely tax-free, before it starts coming back to you.
And unlike other tax-deferred retirement accounts like your 401(k) or IRA, there is no contribution limit. You’re free to sock away as much money as you like, all with tax-deferred benefits.
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Schedule a CallReal Examples: Annuity Interest Accumulation
Let’s take a look at how the interest in your annuity compounds over time. For these examples, we’re using fixed rate annuities, where the interest rate is locked in and won’t change over time.
Example 1: Let’s say you have $100,000 to pay into an annuity – maybe from an inheritance, the sale of your home, or from your savings. If you bought an annuity that pays 3% interest, in 15 years, the total value of your annuity would be $155,796.74. Not bad, right?
Example 2: Let’s say you have $50,000 to pay into an annuity that earns 5% interest. In 5 years, your account value would be $63,814.08. And that’s for doing nothing but letting that money grow and compound over those five years. No investment knowledge needed, no risk, no nothing.
Insurance companies offer a variety of interest rates, so having an agent to help you shop around is a huge plus.
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Schedule a CallTop Reasons for Buying a Retirement Income Annuity
Because of the stability and tax advantages described above, annuities are a great fit for people who want to:
- have a guaranteed financial cushion in case they live longer than expected
- avoid being a financial burden on a child or spouse
- cover the potentially large expenses associated with healthcare and long term care in retirement
- create their own income stream that’s not dependent on the government or the stock market
- maintain their current standard of living during retirement
Annuities make sense for anyone who is afraid of outliving their retirement savings. To get guaranteed income for life, give me a call today!
Schedule a Call*Annuity.org, “Running Out of Money in Retirement: What’s the Risk?”, accessed 4/4/23
**CNBC.com, “Will Social Security run out of money? Here’s what could happen to your benefits if Congress doesn’t act,” accessed 4/4/23
^CNBC.com, “Annuity sales hit record last year, eclipsing sales during 2008 financial crisis amid fear, higher rates,” accessed 4/4/23
^^Marketwatch.com, “Here’s exactly how much Americans have in savings at every age — and (yikes) here’s what they should have,” accessed 4/4/23
