In addition, sources of steady retirement income have changed. Fewer workers are covered by traditional employer-provided pension plans that provide a lifetime benefit. Also, Social Security is not likely to provide future retirees the level of benefits that it provides today. Americans need other ways to create and guarantee lifetime income so their standard of living doesn't decline with age.
To achieve a secure retirement, more and more retirees are including an individual annuity in their plans. An annuity can provide a steady stream of income for life, shifting the burden of managing savings from you to your life insurance company. No other personal financial product offers this guarantee of lifetime income. For many, the income guarantee helps offset worries associated with running out of money.
To assure yourself an income during retirement, consider "annuitizing" a portion of your retirement savings. Annuitizing means converting some of your assets into regular income that can last for a specific number of years or for life. This post will explain the pros and cons of annuitization and help you decide if it's the right way to help meet your retirement income needs.
Should you annuitize?
You should annuitize if you want to reduce the risk of outliving your assets. Because you receive a guaranteed income stream, annuitizing can help protect your standard of living in retirement.
When is the best time to convert to an income stream?
It depends on your situation. It could be at retirement or whenever you need to replace other sources of income.
How much income could you receive by annuitizing?
It depends on the amount you convert, your life expectancy, interest rates, and the payment option you choose.
Can you change your mind after annuitizing?
The decision to convert is irrevocable - you can't change your mind. And once you choose an annuity payment option, the decision becomes irrevocable as well.
Benefits of Creating an Income Stream with a Portion of Your Retirement Assets
- Guarantee yourself - and someone else, if you wish - an income for life. (Other distribution methods - automatic withdrawals, lump-sum distributions - don't do this.)
- Spend more comfortably, knowing that your risk of running out of money is reduced.
- Create your own pension.
By choosing the right payment option and calculation method, you can tailor your income stream to meet your needs, and, if you wish, the needs of your spouse or others.
Choose a payment option
Option 1: Life annuity.
If you choose yourself as the "annuitant" - the person whose life expectancy will be used to calculate each annuity payment - you'll be guaranteed income for as long as you live.
Option 2: Joint and last survivor annuity.
If there are two annuitants, such as you and your spouse, payments will continue as long as either of you is living. The survivor, or joint annuitant, can receive payments that are 100%, 75%, or 50% of the original amount.
Option 3: Life annuity with period certain.
You'll receive payments for a specific periods ranging from 5 to 30 years. If you die before the period ends, your beneficiary receives the remaining payments. This option is available only with fixed payments.
Other income options are available. You also can choose to receive income in a series of payments for a specified number of years.
All annuity contracts offer their owners the right to convert the money in their annuity to a guaranteed lifetime income. If the owner buys an immediate annuity, the conversion takes place within a year of the purchase date. If the owner buys a deferred annuity, he has the right to convert at some future date.
Federal Tax Treatment
Earnings on a deferred annuity build up free of current federal income tax. When you withdraw money or receive income payments, the portion that comes from earnings is taxed as ordinary income. With an immediate annuity, you pay ordinary income taxes on any earnings when you receive payments. The portion of the payment that represents your initial contribution is not taxed if your annuity was purchased with after-tax dollars.
Because taxes are deferred until money is withdrawn or received as income, there are tax penalties for early withdrawals. If you choose to withdraw money from your deferred annuity before you reach age 59 1/2, you will trigger a 10 percent tax penalty on the earnings portion of the amount withdrawn plus the income tax due on earnings.
Annuity earnings also may be subject to state taxes, which vary according to state. Check with a local tax adviser for more information.$
www.RayBuckner.retirevillage.com
