The Possibilities of Annuities
You can choose among different ways to buy an annuity, and you can set up a schedule for receiving income that suits your needs. With variable annuities, you can decide the level of investment risk you want to take, and select among a number of separate account funds that match your income objectives.
When you've identified what you want an annuity to do for you, you can select a contract that's designed to do it.
PUTTING IT TOGETHER
Buying the right annuity may seem intimidating because you have so many choices. But you can simplify the process by focusing on four decisions:
How you want to invest
You can buy an annuity with a single lump-sum payment or make multiple contributions on either a regular or discretionary schedule.
- When you want to receive income
Immediate annuities let you start receiving income right away while deferred annuities let you build your account tax deferred until you need retirement income.
When you are ready to draw from your retirement savings, all annuities offer you a number of options for receiving income. You are guaranteed lifetime income if you choose to annuitize, which means converting your retirement savings into a stream of regular — usually monthly — payments. Or you may choose to take systematic withdrawals, which offer more flexibility but don't guarantee lifetime income.
THE PLACE TO START
Here are some guidelines to help you begin to sort out what you want your annuity to do for you:
- Analyze whether money you may have in investments, certificates of deposit (CDs), or money market accounts could be working harder for your future
- Anticipate when you may want your retirement savings to begin providing income
- Decide how much you should be committing regularly to long-term retirement savings
- Compare the advantages of retirement plans that have historically outpaced inflation with the security of a guaranteed rate of return
One appeal of nonqualified annuities — also known as flexible premium annuities — in addition to the choice of how you'll receive income, is that you can decide when you begin collecting it. You can start without tax penalty as soon as you turn 59 1/2, as you can with IRAs. But unlike traditional IRAs, you can postpone taking income past age 70 1/2. The older you are when you annuitize, the larger your income has the potential to be. That means you can use it to cover a larger percentage of your expenses.