Retirement Annuities: How to Bridge Gaps in Your Retirement Finances

Whether retirement is far away or right around the corner, you can take steps now to prepare. Even if you’re years or decades away from retiring, it’s important to make moves now that your future self will thank you for later. One way to plan ahead is setting up income with annuities.

Try to imagine what your ideal retirement looks like. Does it include traveling, spending time with grandchildren, mastering a beloved hobby or volunteering at a favorite organization? Whatever your post-career dreams include, annuity income can help you generate retirement income streams outside of Social Security and your retirement account(s), making your future more comfortable and secure.

Annuities can be a valuable addition to your current retirement savings strategy. Here’s what you need to know about what annuities are and how they can work for you. 

What Is an Annuity?

An annuity is a financial product sold by a life insurance company. It’s designed to pay a steady stream of income in your retirement years; in other words, investing in one during your working years is a way to guarantee income later. Annuities can be an important piece of your retirement strategy.

Phases of an Annuity

An annuity is made up of two phases: accumulation and distribution. During the accumulation phase, you contribute to your annuity, accumulating money that will provide income later.

The second phase is the distribution phase. This phase occurs when you decide to receive both principal and interest from your annuity. You can begin receiving retirement annuity payments upon reaching age 59 ½; any earlier and you could be charged penalties. It’s up to you how you’ll be paid — one lump sum, annually, quarterly, etc. — and you can also decide how long you’ll receive your retirement annuity payment with options ranging from one-time to lifetime.

Depending on which income payment option you select and whether the annuity is qualified or non-qualified, you may need to pay federal income tax on any earnings withdrawn from the annuity and/or the principal withdrawn. Also, surrender charges may apply if funds are withdrawn before the annuity’s surrender charge period expires. The IRS also imposes a penalty if funds are withdrawn before age 59½. 

Benefits of an Annuity in Retirement

Annuities provide a number of benefits. The primary benefit is a steady stream of income in retirement.* That means you can plan for all of your regular expenses to be covered, alleviating concerns about running out of money in retirement. If you receive a large payout, such as an inheritance, an annuity can turn that into regular income. 

Annuities can also serve as a bridge between working and taking Social Security benefits. The longer you wait to begin taking Social Security (up to age 70), the higher your monthly benefit will be. You may want to wait to begin taking Social Security benefits but need regular income until then; that’s where an annuity can help.

Some types of annuities are tax-deferred. That means you won’t pay income tax on your earnings until you begin withdrawing money, and because your tax bracket is often lower in retirement, you may pay less taxes overall on your earnings. Furthermore, because your contributions will grow on a tax-deferred basis, your money is allowed to grow more quickly over time.

Types of Annuities

When it comes to choosing an annuity in retirement, you can pick a fixed annuity or an indexed annuity. As its name suggests, a fixed annuity offers a fixed interest rate, which means your money grows at a steady rate that isn’t tied to market performance. On the other hand, an indexed annuity allows you to take advantage of potential gains in the market while protecting you from loss by flooring losses at zero.

Once you decide on a type of annuity you prefer, you’ll have options for how you want the annuity to be structured. Deciding which is right for you will depend on factors like your age, your risk tolerance, your income and how much you want to invest. 

Helping You Reach Your Retirement Goals

When it comes to retirement, you want to be sure you’ll be able to enjoy it on your terms. A Farm Bureau agent will get to know you and discuss ways to help you reach your goals. Contact an agent today!