What you need to know about annuities
Annuities have a bad rap these days. Motivational speaker Dave Ramsey says not to use them. Hardly anybody understands them. Annuities just get no love! Why should you consider one?
Annuities can be a good choice when you don’t have sufficient funds to ensure that you’ll be able to live comfortably indefinitely. While the goal is to have enough money saved up that you can live entirely off of the interest, many people find they have to draw down the principle, which means there’s a limit to how long they can stay in retirement. Nobody wants to be 90 years old and suddenly run out of money! An annuity, however, guarantees that you’ll receive a fixed amount every month for the rest of your life, even if you happen to end up competing for world age records.
How does it work? You can put down a lump sum to buy the annuity immediately, or you can fund it over time. Assuming you don’t plan to start taking distributions right away, your money will grow tax-deferred; you can choose either a fixed annuity, in which case the amount of interest you’ll receive is guaranteed, or a variable annuity, in which case it depends on how your selected mutual funds perform. Generally the fixed annuity is preferred as it guarantees you a certain level of retirement income; if you can afford a large enough annuity that this will satisfy your basic needs, then any funds from your other retirement plans can be spent on luxuries.
Note that unlike a Roth IRA or 401(k), both the money you put into the annuity and the return on your investment is taxable. It will grow tax free, but once you begin taking disbursements, part of that will be taxed. Each payment is deemed to be partially return of principle (which is not taxed) and partly interest (which is subject to your normal income tax rate).
Tags: 401 k, annuities, dave ramsey, fixed annuity, investment, ira, mutual funds, retirement plan, retirements, roth ira, variable annuity
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