How to Use Annuities for Retirement

a desk with calculator, pennies, and a nest with eggs on them symbolizing retirement funds

There are many ways to save for retirement and ensure that you’ll have income for the rest of your life. An annuity can be a perfect way to make sure you’ll always have revenue coming in, but how does it work? If you aren’t sure of the process, here is how you can save for retirement using an annuity.

Learn the different types of annuities.

Different types of annuities are created for various investment styles. For example, a fixed annuity is perfect for someone if they want a guaranteed payout and you’re less worried about accumulating a lot of interest from your investments. Alternatively, variable annuities offer you high returns if you’re willing to participate in the high-risk stock market.

Another thing you should consider is how you want to pay for your annuity. Do you want the payments spread out or are you looking to spend one, large lump-sum? An immediate annuity is perfect if you want to make one lump-sum and you’re looking for payments to start within the year. Alternatively, with a deferred annuity, you can make monthly premium payments and start making withdrawals at a specified date in the future.

As you can see, many different types of annuities are available for your life and investment style. If you need to retire soon, you may look into investing in an immediate annuity, but if you have 10 years or more, a deferred annuity may be right for you.

Shop around for the best option.

Annuities are guaranteed by the company that is underwriting them. Never go with the first option you receive because it may be a “cookie-cutter” annuity. What I mean by “cookie-cutter,” is that insurance companies have a habit of offering the same plan to every customer that comes through the door without discovering their investment styles. Avoid financial investors that don’t consider your personal investment methods.

After collecting a few offers that seem appealing, compare them and determine which has the lowest fees and the better payments. Look closely at the amount of time you have to pay your premium. Take the riskiness of the annuity into account. Of course, a variable annuity looks potentially great, but the risk involved may not be right for you.

Purchase the plan, but remember the free look period.

After you buy an annuity, you have a certain amount of time to change your mind after signing the contract. This period is the “free look period.” The amount of time varies from state to state, but in general, you have about 10 days to cancel your policy without any repercussions. Use these 10 days to determine whether or not you should keep the policy and if you’re satisfied with the contract.

Wait as long as you can to start making withdrawals.

Unless you have a maximum amount of time you can wait to start making withdrawals (like with a deferred annuity), try to postpone as long as you can before beginning. By waiting, you’re accruing interest that can result in higher payments later in life. Most annuities require you to wait until you’re at least 59 and a half. If you choose to make withdrawals before this age, you’ll be subject to a 10% IRS tax penalty. Additionally, you may be forced to pay a surrender charge that can be as high as 20%.

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