Retirement Planning

Annuities as Part of Your Retirement Plan

How do annuities fit into retirement planning? This article provides a high-level overview of the types of annuities available and how they can be used for retirement.

Boosting Your Retirement Planning Confidence With Annuities

If annuities are part of your retirement plan, then you're in good company. In a published study, The Differences They Make: An Advisor, an Annuity or a Formal Plan in a Retiree's Life (2018), by the LIMRA Secure Retirement Institute found 73 percent of retirees who own an annuity believe they will be able to live the retirement lifestyle they want.

How annuities work

An annuity is a contract between you and an insurance company. You make an investment in the annuity, and in return the insurance company agrees to make a series of payments(or a lump- sum) beginning on a future date. The income you receive from an annuity can be paid out for a specified period or even for the rest of your life.  

Retirement planning using annuities

Annuities are often used as a retirement planning tool primarily because they can allow you to turn a lump sum of money into a steady income stream for a set number of years, or even the rest of your life. Common uses for annuities in retirement planning may include, among other things, accumulating assets, supplementing Social Security or a pension, and receiving income for life. 

Retirement advantages of annuities

One of the greatest advantages of using annuities for retirement planning is that you can put away larger amounts of cash and defer paying taxes. Just like your 401(k) or IRA, as long as you leave your earnings alone, the growth on annuities is tax-free until funds are withdrawn. However, unlike other tax-deferred retirement accounts, there are no annual contribution limits. Not only does this allow you to save more, it is useful for individuals who are near retirement and need to catch up. 

Types of annuities used for retirement include:

  • Fixed Annuity

    A fixed annuity gives you the promise of fixed interest payments over a specified period of time. You agree to deposit a lump sum of money or series of payments and the insurance company agrees to pay you a guaranteed rate of interest that compounds on a tax-deferred basis. 

  • Variable Annuity

    A variable annuity (VA) puts your money in investments that you select from a list made available by the issuing insurance company. Most often, those investments are a variety of portfolios providing you with options that may include both stocks and bonds. As an additional benefit, some VAs offer an enhanced death benefit that guarantees your beneficiary won't receive less than your original investment (minus withdrawals) - no matter how the funds perform.  However, all guarantees are dependent upon the claims-paying ability of the issuing insurance company.

  • Indexed Annuity

    The indexed annuity is a type of fixed annuity that calculates interest payments based on upward and downward movements in common indexes such as the S&P 500 Index.  You are provided the opportunity to enjoy the benefits of positive upturns in the index (subject to a cap) with a limit to your downside risk. However, you would not be directly invested in the stock market or index.

  • The combination of tax deferral and the ability to establish guaranteed income can make annuities an effective part of a retirement plan while protecting retirees from the possibility of outliving their income. 

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Annuities are intended as vehicles for long-term retirement planning, which is why withdrawals reduce an annuity's remaining death benefit, contract value, cash surrender value and future earnings. Annuities also may be subject to income tax and, if taken prior to age 59 ½, an additional 10% IRS tax penalty may apply. 

Investors should carefully consider the investment objectives, risks, charges and expenses of a variable annuity, any optional protected lifetime income benefit and the underlying investment options before investing. This and other information is contained in the prospectus for a variable annuity and its underlying investment options. Investors should read the prospectus carefully before investing. Prospectuses may be obtained by calling PLICO or PLAICO at 888.340.3428.

All Learning Center articles are general summaries that can be used when considering your financial future at various life stages. The information presented is for educational purposes and is meant to supplement other information specific to your situation. It is not intended as investment advice and does not necessarily represent the opinion of Protective Life or its subsidiaries.

Learning Center articles may describe services and financial products not offered by Protective Life or its subsidiaries. Descriptions of financial products contained in Learning Center articles are not intended to represent those offered by Protective Life or its subsidiaries.

Neither Protective Life nor its representatives offer legal or tax advice. We encourage you to consult with your financial adviser and legal or tax adviser regarding your individual situations before making investment, social security, retirement planning, and tax-related decisions. For information about Protective Life and its products and services, visit www.protective.com.

Companies and organizations linked from Learning Center articles have no affiliation with Protective Life or its subsidiaries.

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