- If you wonder whether your savings will last in retirement, annuities may help you feel more confident.
- Annuities can provide valuable benefits such as tax-deferred growth, guaranteed income and a buffer against stock-market losses.
- Your financial advisor can help you understand the benefits, costs and tradeoffs of annuities and how they may be appropriate in helping you achieve your retirement goals.
“Will my savings last after I retire?”
It’s a common question, and to answer it with confidence many investors turn to annuities to generate a reliable income stream in retirement. Here’s what you need to know for a conversation with your advisor.
What is an annuity?
Annuities are long-term investment vehicles that generally offer the ability to grow your money and create retirement income for as long as you need it. Annuities can help you supplement other sources of guaranteed and stable retirement income — such as pensions or Social Security — to cover essential expenses, if other income sources fall short. Most annuities also offer a death benefit that protects your original investment for your beneficiaries.
There are two categories of annuities — deferred and immediate — and several types of annuities within each category. The most common deferred annuities are fixed annuities and variable annuities. Each offer a range of options to meet your needs
- Fixed annuities offer a fixed rate of return guaranteed to never fall below a minimum rate. They also offer the option to annuitize — or convert your account to a series of guaranteed income payments — for either a specific period of time or for as long as you live during retirement.
- Variable annuities are part investment and part insurance and also offer growth potential from the underlying funds you choose. In addition, they offer a death benefit that protects your investment for your beneficiaries. Optional benefits, such as guaranteed lifetime income, are available for an additional fee. They also offer the option to annuitize – or convert your annuity into a stream of guaranteed income.
These guarantee an income stream in return for a lump-sum payment. You can choose from a variety of income options, including some that provide income for your spouse or beneficiaries if you die prematurely.
All guarantees are subject to the claims-paying ability of the issuing company. These guarantees do not apply to the investments in the annuity, which will vary with market conditions.
Annuity myths… and facts
Given the array of annuity choices and optional features, here are facts to dispel five common myths.
- Myth: “An annuity is not the only way I can guarantee lifetime income from my retirement assets.”
Fact: Retirement could last several decades, and it is possible to run out of money. Since no one can predict exactly how long we will live, a solution like an annuity can help ensure you have income for as long as you need it in retirement.
- Myth: “Annuities are only for retirees.”
Fact: Annuities can be part of your financial picture in your working years. Because deferred annuities offer tax-deferral, you have more time to grow your money without paying income taxes on earnings. In that scenario, if you choose a variable annuity you may have the option to invest in the stock market for growth and to protect your principal for beneficiaries. Two additional reasons you might purchase an annuity before retirement: 1) To roll over a workplace retirement account when you change jobs; and 2) To continue saving after you reach 401(k) or IRA annual contribution limits.
Most annuities have a tax-deferred feature. So do many retirement plans under the Internal Revenue Code. As a result, when you use an annuity to fund a retirement plan that is tax-deferred, your annuity will not provide any necessary or additional deferral for that retirement plan. But annuities do have features other than tax deferral that may help you reach your retirement goals. Consult your tax professional prior to making a purchase for an explanation of the tax implications.
- Myth: “Once I invest in an annuity, my money won’t grow.”
Fact: A variable annuity provides long-term growth potential because you select underlying investment options based on your goals, risk tolerance and time horizon. You may purchase an optional benefit that protects your original investment from losses. Conversely, a fixed annuity that offers a guaranteed minimum interest rate may be a good choice for the conservative portion of your portfolio.
- Myth: “Annuities are expensive, and the fees aren’t worth it.”
Fact: Annuities do charge fees, but they also offer features that can help you achieve your retirement goals. For example, the money in a variable or fixed annuity generally grows tax-deferred. In addition, you can consider purchasing options that help you grow your savings, protect them from losses and pass on your savings to your beneficiaries. Your advisor can help you understand whether an annuity is appropriate for your financial goals and needs as well as the tradeoffs related to fees.
- Myth: “If I die early, the insurance company keeps all of the money in my annuity."
Fact: With a fixed or variable annuity, your beneficiaries will usually inherit the value of your annuity at death. Variable annuities also typically include a death benefit (in some cases, there may be an additional fee) that ensures your beneficiaries receive at least your principal, if your annuity value has dropped. With an immediate annuity, you may opt for provisions that will guarantee income to your beneficiaries of at least the amount you paid to the insurance company.
Your advisor can help
When is the right time to stop working and retire? Will your money last as long as you need it to? How can you protect your retirement income from losses?
These are key questions to discuss with your Ameriprise advisor, who can provide you with personalized advice to help you achieve your financial goals.
This information is being provided only as a general source of information, and is not a solicitation to buy or sell the securities mentioned. The information is not intended to be used as the sole basis for investment decisions, nor should it be construed as advice designed to meet the particular needs of an individual investor.