A successful retirement plan is composed of many different elements. One of these elements are annuities. Why are annuities so important? In this article, we will go over 5 reasons why annuities are important for retirement.
1. Disciplined Savings
During the accumulation phase, most annuities have strict rules regarding the withdrawal of money. Usually, withdrawals are limited to a small percentage during this period. These restrictions are beneficial since they help you from spending down your retirement savings, thus leaving those funds to generate additional income.
2. Power of Compound Interest
Annuities are long-term growth products. Because of this, the power of compound interest is very strong. Compound interest is when your interest also earns interest, as opposed to just your original investment. (Source: https://homecareassistance.com/oakland/) For example, if you invest $50,000 into an annuity with a 6% guaranteed interest rate, in 10 years your balance will grow to $89,542.38.
Fixed annuities provide a lot of safety. All income and principal is guaranteed, so there is no need to worry about losing money due to fluctuations in the market. You take on very little risk when investing in a fixed annuity.
4. Tax Deferment
You can fund your annuity with qualified or non-qualified funds. Whatever type of money you choose to fund with, it will grow tax-deferred. This means that you will not have to pay any taxes on the amount until you begin taking distributions.
5. Guaranteed Income
With an annuity, you can choose a payout option that will guarantee you a monthly paycheck. This gives you guaranteed income that you can rely on for the rest of your life.
Other Facts You Should Be Aware Of
If an annuity sounds like it would fit in your retirement plan, there are some other facts you should be aware of before you start shopping around. For example, variable versus fixed. Variable annuities are invested directly in the market and they have no guarantees, so if the market drops you could lose a substantial amount of money. You take on a lot of risk with variable annuities. Then there are fixed annuities. These annuities will guarantee you a fixed interest rate for a certain period, you will get this whether or not the market goes down. With fixed annuities, you take on little to no risk. It is important to be aware of the difference since variable annuities are a risky choice.
You also need to be aware of surrender periods. The surrender period is the amount of time that you cannot take distributions without having to pay a penalty charge. The length of the surrender charge will vary between annuities. But most will allow you to withdraw a small percentage each year, penalty free. It is important that you understand and feel comfortable with the surrender period before purchasing an annuity.
Where to Find Help
If you would like a more in-depth explanation about why annuities are important for retirement, or you would like help with finding a reputable company you may be wondering where to look for help. A qualified insurance agent can help you to find the best product that will fit your situation and needs.
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