You decide on the annuity features that put you on the right track.
Annuities are flexible, tax-deferred investment plans that you can use to help you achieve your long-term financial goals and provide a source of retirement income.
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 the plan is offered You may be able to choose an annuity as part of an employer-sponsored retirement plan such as a 401(k) or 403(b). You can always buy an annuity yourself, as part of your own retirement planning.
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.
The type of income you want Fixed annuities provide income at a specific rate. Variable annuity income changes to reflect the investment performance of the portfolios you choose.
A BRIEF CIRCULAR HISTORY Annuity comes from the Latin word annuus, meaning yearly. Originally it referred only to a sum that was payable once a year. Today, the word annuity can mean both income paid on a regular schedule, and a type of retirement savings plan (a deferred annuity) that offers flexible purchase and withdrawal options, including — appropriately — one that pays income on a regular schedule.
Earnings in all types of annuities compound tax deferred until you begin to take money out. That means you can build a larger retirement savings account than you would be able to if some of your earnings went to pay income tax every year. Remember though, that while earnings in a fixed annuity are guaranteed, earnings in a variable annuity are not.
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:
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 LESS RESTRICTION 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.