The Social Security trust fund will be depleted by 2033, resulting in reduced benefits going forward, according to a prediction in the Social Security and Medicare Boards of Trustees summary of their 2013 annual reports. Tax income will only be sufficient to cover 77 percent of scheduled benefits, and this number drops to 72 percent by 2087. Given this, smart millennials are considering buying annuities to boost their retirement savings. If you’re considering purchasing an annuity, here’s a get-started guide:
How Annuities Work
Just as life insurance provides for your loved ones if you die, an annuity guarantees your own income if you outlive your savings. You pay an insurance company an amount in return for guaranteed income starting at a specific date. This is like depositing money into a savings account which pays you back with interest—only annuities enjoy tax benefits over regular savings accounts.
Varieties of Annuities
Annuities come in two main varieties distinguished by the length of time before payment distributions begin, called the “deferral phase” of the annuity. In an “immediate annuity,” the deferral phase is nonexistent or minimal, with initial distributions typically beginning within a year. In a “deferred annuity,” which also goes by other names, deferral continues longer.
During the deferral phase, as you make one or more deposits, the value of your annuity increases on a tax-deferred basis. The increase can be set at a fixed interest rate or it can fluctuate at a variable rate tied to the performance of stocks and bonds.
After deferral an annuity enters its “income phase.” During this phase, depending on your plan, you may receive a series of payouts or a lump sum. Distributions can be fixed or increase at a periodic rate. Payouts can extend over a set number of years or the lifetime of one or more beneficiaries.
Some annuity holders may decide to liquidate their policy by selling all future payments for a lump sum of cash upfront. You can learn more about this option by visiting the J.G. Wentworth Facebook page or another company that buys annuity and structured settlement payments.
You can buy an annuity with single payment or multiple deposits. Payment distribution methods also vary.
Use Annuities Wisely
Annuities can help guarantee retirement income under certain circumstances. For those who are nearing retirement age, an annuity can help ensure continued income and postpone tax obligations, provided that payments are scheduled to kick in before other assets are entirely used up, and if the policy holder is willing to run the risk of dying before payouts start.
For younger people seeking to adopt this strategy, retirement planners suggest a fixed annuity as a viable option for those expecting their annuity to provide their main source of retirement income, while variable annuities may serve those with multiple investment streams. Young annuity holders should be aware of penalties for early annuity withdrawal and consider whether they will need the money before retirement when weighing annuities against other options.
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