Fixed annuities could be an extra boost for retirement

By Barbara Floyd, AAMS, CPA

In an era when few Americans enjoy the stability of pensions from their employers, investors have become increasingly responsible for their own retirement planning. Fortunately, many Americans are covered by some form of employer-sponsored retirement plan, such as a 401(k).

While taking advantage of your employer-sponsored plan is a great way to start saving for retirement, many investors find that they will need or want an additional, set income in their retirement years.

Many investors, particularly those nearing or entering retirement, are looking for an investment option that will produce a predicted income. One option for such income is a fixed annuity.

When you purchase an immediate annuity contract, you enter an agreement to pay a regular premium or lump sum to the provider — typically an insurance company. In return, the provider issues you a monthly payment for the rest of your life, or another agreed-upon period.

Of course, this agreement is only as stable as the company in which you have invested. Be sure to discuss the stability and reputation of the insurance company with a trusted financial advisor. Your advisor should be able to obtain ratings from an independent agency to help determine the viability of the company.

Fixed annuities can be immediate or deferred. When you purchase a fixed immediate annuity, you pay a lump sum to initiate the contract. Payments to you begin within 12 months and continue until your death, or until the conditions of your contract have been met.

In a deferred fixed annuity, you typically make periodic payments during what is called the accumulation period, but a deferred annuity can also be funded with a lump sum. When it is time for you to receive payments, you "annuitize" your investment. Then regular payments begin. Many investors annuitize their investment during their retirements. There can be tax implications when you receive payments from your annuity, so be sure to consult with a tax professional.

Fixed annuities are not used as vehicles for accumulating wealth. Fixed annuities rarely provide returns that are comparable to equity investments. Rather, they are tools to help protect against spending all your assets before you die. You can purchase a contract that will make payments over just your lifetime, your lifetime with a minimum term (should you die prematurely) or your lifetime and your spouse's lifetime. Because the payments are set, fixed immediate annuities can be a welcome addition to other sources of retirement income, such as IRAs, Social Security or equity and bond investments that may fluctuate or deplete over time.

Several factors affect the monthly payment you will receive from an annuity. Because women typically live longer than men, their payments are usually lower. If you have purchased a contract that covers only your life (rather than yours and your spouse's lives), your payments will be higher.

Choosing investments to help you achieve your financial goals can be complicated. Because your tolerance for risk and time horizon for investing are individual, it is best to consult with a qualified financial professional before making decisions about investments.

Barbara Floyd, AAMS, CPA, is a financial advisor of Legg Mason Wood Walker, Inc., a diversified securities brokerage and financial services firm that is a member of the New York Stock Exchange, Inc., and SIPC.

This content has not yet been Rated.

To Rate content, please Login.