Senior Citizen's Guide digital books
Senior Citizen's Guide to Chicago
Making Annuities Work for You in Retirement

Annuities are one way to build a retirement nest egg. But an annuity is such a flexible investment device that it can be just as useful after you have retired. The way to attain a financially stable retirement is to match your income flow with your lifestyle needs -- and annuities may help.

Annuities are designed to accumulate money on a tax-deferred basis, which means that more of your money is working for you. They can not only be designed to fit your investment preferences -- stocks, bonds, a balanced portfolio, an emphasis on foreign investments -- but the investment mix in many cases can also be changed with a telephone call in response to economic conditions or your own needs. And, the money can be withdrawn as you need it -- to cover a long-planned expenditure or to meet a sudden crisis.

Because annuities can be structured in many ways, they can be difficult to understand. In basic terms, you pay a lump sum into an annuity policy, and it pays back a set amount periodically as long as you live or for a specified period.

That kind of annuity (an immediate annuity) can be a wise part of a retirement portfolio for many people. But in recent years insurers have also developed deferred annuities, which can build up value over time while delaying income - along with the taxes on it.

An immediate annuity often seems attractive to someone who is just retiring -- receiving a lump-sum distribution from a corporate savings plan and deciding how to apportion it. In return, for a single payment, he or she gets a check each month for a predetermined amount, based on life expectancy. The payout can be set up to continue after the retiree's death (in full or at a specified reduction) for the life of the retiree's spouse.

The advantage of an annuity is that the amounts of the monthly payments are certain -- with none of the fluctuation that you can get with securities that react to market pressures. For those who are very risk-averse and are not drawing a continuing pension, annuities can be an ideal investment to help cover basic living expenses.

But an immediate annuity should only be part of your retirement portfolio, supplemented by investments that provide an opportunity for growth. That's because over time, inflation will eat away at the purchasing power of the monthly annuity check -- and the longer you live, the more serious this gap between buying power and prices will get. Moreover, the amount put into an immediate annuity is not available as a legacy for your heirs.

The other kind of annuity -- in which the payout is deferred -- can be a good way to pass on some of your accumulated wealth to those whose futures you want to ease. Say you want to make a $10,000 gift to a new granddaughter. If that money goes into an annuity, the entire amount has the potential to grow until she begins drawing on it. Many other kinds of investments would produce earnings that would be subject to taxes, so there would be less principal to grow.

With an annuity, the $10,000 may have grown to $50,000 by the time your granddaughter graduates from college. If she decides at that point to tap into your gift to travel or set up her first apartment, the amount withdrawn will be taxed. The Internal Revenue Service will also impose a ten-percent penalty on her withdrawal, as it does on all money taken out of these annuities by people under the age of 59. But she should still be ahead of where she would be if the growth had been taxed each year. You can select an annuity that pays a fixed rate of return or one that varies with the value of the securities in which the money is invested.

If you do buy an annuity, be sure it's issued by a financially strong and stable insurance company -- and attempt to work through a brokerage firm that will monitor the insurer's performance. It's smart to consult with an advisor who can match the many features available in annuities to your individual situation.

Home    Featured Programs    Choose Local Area     Request Information
A JR Media Publication • www.jrmediallc.comSite Index