Annuities are setup, typically, following a judgment by a court or settlement with a large company following an incident. It is important to review the terms of the agreement and understand how many years you will receive payments if it is not a lifetime annuity. If you are in need of immediate money, you may be able to sell your annuity, or a portion of it, to satisfy your emergency need. This does cut into your retirement savings and available annuity balance.
Understand the Terms of your Annuity
Before attempting to make annuities last through your retirement, you should understand what an annuity is first. A large sum of money is awarded to a person or group. This sum of money is allocated through annual payments, which are usually broken into monthly payments, which becomes taxable income. It is important to understand that paying income taxes on annuities is required, but only as the funds are distributed. You are only taxed for payments received each year, not the total value of individual annuities.
The most common options are variable annuities. This setup allows you to control what assets to invest in. Immediate annuities are another option, although unpopular, have a higher payout than variable annuities. Selecting the right type of annuity for your financial needs helps in making your retirement savings last throughout your lifetime.
Do Not Sell your Entire Annuity
Selling partial annuities is something that many consumers have to do to satisfy an immediate or urgent financial need. It is a better option to sell a portion of your annuity, rather than the entire value. Selling entire annuities takes away the extra funds you would have for your retirement that could leave you financially stable, rather than living on a fixed income.
Buy an Immediate Annuity
Although Social Security is guaranteed income, it is still fixed income. A new rule in making your money last in retirement is purchasing immediate annuities. You can add a joint-and-survivor option to the purchased immediate annuity to continue payments to that beneficiary after your passing. Another benefit of annuities, especially in the case of an immediate annuity purchase, is the annual inflation adjustment. This rate is typically 2-percent.
Although the annual inflation adjustment rate is a low percentage, the trade-off is that it provides income longevity and the ability to invest in multiple markets.
Avoid Tax Penalties
Income taxes are charged on annuity payments that are received yearly. You will receive a statement and it must be claimed as taxable income. The benefit is that you do not have to pay taxes on the entire amount awarded all at once, which would be double taxation. If this income is not claimed, you could face tax penalties and fines.
Use a Calculator
If you are buying annuities from other parties, use a calculator to ensure that the investment is substantial enough to make your retirement savings last a lifetime. Purchasing an annuity provides you with a retirement savings option. When purchasing annuities, investors purchase at a cost less than the annuity’s value to ensure a return on their investment is made. Calculators help you see how much you will receive for the life of the annuity, or yourself, depending on the terms set when the annuity was awarded.
It is a good idea to take some of your annuity payments and invest with them. You can purchase CDs, stocks or mutual funds, to name a few options. These investments can return large yields when invested properly. Invest in yourself by starting a new business or becoming a business partner. The best way to decide which annuities investment options are best for you is to hire a financial advisor to guide you based upon your skills, needs, and financial goals.
Place Withdrawals in a Savings Account
To ensure that you don’t outlive your money, it is suggested to schedule withdrawals of annuities at a rate of 4-percent annually. Setting a general rate is ideal for persons with annuities that are under age 40 to ensure that you are receiving payments or putting enough into a savings account that will finance you for life.
You can still work while receiving annuity payments. Annuities are lifelong income that are fairly easy to manage. It is ideal to put a portion of your annual or monthly payments into an interest bearing account that can become part of your family estate. Managing annuities does not have to be difficult and a financial planner or advisor can assist you in making the right decisions.