Annuities

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Nurturing an Annuity is Like Watching a Garden Grow

 

You start with a seed and hope your efforts will blossom into a bountiful harvest. But when it comes time to harvest the fruit, how do you determine what’s the best road to take? Age, marital status, income/assets, health and tax issues can all come into play.

       

The preferred method of taking income from a deferred annuity remains systematic withdrawal plans (SWPs). The spectrum of income options in the past decade that provide greater flexibility and maintain owner control make these features more attractive. Consider that to annuitize, in the purest sense of the word, means to forfeit the principal in the account to “purchase” an income. With you would totally surrender your policy in exchange for a regular check. Only a “fraction” of annuity owners actually annuitize but there are circumstances where it can make sense although it is not typically recommend. Insurance companies tend to understand the numbers better than the players. In most cases, annuity holders can do better with some education and a nice, conservative systematic withdrawal.

       

Joint and survivor payouts are used when two people will need the income, but won't need as much if one was to pass away. Certain periods guarantee payments for a stated period, even if the annuitant should die. These can come in handy if one is concerned about dying relatively soon but wants heirs to enjoy future payments or if there are liabilities that must be paid within a certain time period. Lifetime payouts offer the greatest periodic payout, but are also the riskiest, since the payments end once the annuitant dies.

         

Potential drawbacks for choosing an annuity payout option include lack of flexibility, inflation risk and the possibility of reduced returns since the selected payment structure is usually irrevocable. This can be problematic should your financial situation suddenly change.

             

Inflation is another risk. Tomorrow’s dollars are rarely worth the same as they are today. This is particularly true for those choosing a fixed payment. Future purchasing power of any anticipated income stream, especially an inflexible one, has to be taken into account. However, many prefer the security of knowing the exact dollar amount to be received.

      

There is no magic rule and no payout option to generally recommend since the most appropriate payout is specific to your unique circumstances. Income solutions should be part of a broader financial planning process.

 

The Annuity Check List

  • Have you exhausted tax-advantaged retirement accounts?
  • Do you like the idea of receiving “income for life”?
  • Are you concerned about financial liabilities your heirs may face?
  • Do you understand the concept of “annuitization”?
  • Have you considered inflation risk?

 

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