If you’re planning for present or future income, you should consider an annuity. These safe and insured investments have worked for investors for over 125 years. And they are specifically designed for growth and income.
Everyone wants a secure retirement with a stream or worry-free income. There are many ways to create reliable income. It’s wise to have more than one option in case other investments fail to perform. Annuities are a smart way to backstop your retirement goals.
Interest Rates Are Up
As of the writing of this post, interest rates are up – and still increasing. When bond rates go up, so do annuity yields. You can lock in some of the most competitive guaranteed rates of return we’ve seen in two decades. Many annuity accounts yield close to 6% guaranteed for terms of 3-10 years.
This is also advantageous for immediate annuity accounts – and fixed-indexed annuities with guaranteed income riders. Whether you need income now or you are planning for future income, locking in these historically high rates creates fantastic passive income opportunities.
Policies can be set up with qualified and non-qualified funds. Many of our clients use both post and pre-tax money when funding their accounts. Annuity companies accept all type of IRA money for deposit.
Fixed and Immediate Annuities For Income Now
If you’re over age 59 1/2, you can take income from any type of annuity account without IRS penalties. Fixed annuities are very popular with our clients. These accounts work like bank CDs allowing investors to withdraw systematic income without touching their principal. For example, $500,000 yielding 6.00% would generate $2,500 a month of passive income without decreasing your principal.
Most of our clients invest in a few different fixed annuities by using a laddering strategy. This means their accounts have different maturity lengths. Some of their funds are invested for shorter terms of 2 -4 years while others are longer term in nature. This way, some of their principal matures every year or two and is fully liquid. All the while they are earning systematic monthly or yearly income.
Immediate Annuity Accounts For Larger Income Streams
Immediate annuities are also popular for our clients who want income now. The primary difference with immediate annuities is they pay principal and income – not just income. This means your passive income is higher, but you have less access to your invested principal.
Most immediate annuities are set up to create lifetime income. They can also be established with maturities of 5, 10, 20 years, etc. And no, the insurance company does not keep your money if you die early. Almost all immediate annuities allow for the residual principal to be paid to your beneficiaries.
For example: If a 65 year old male invested $500,000 today and wanted monthly payments for the rest of his life (with a cash refund), he would receive over $3,000 a month from an A+ rated carrier. If he added his 65 year old wife, the annuity would pay nearly $2,700 for both of their lifetimes. That is simple, easy, and reliable passive income.
What if I’m Under Age 65 and Want Passive Income Now
The first thing to know is the IRS treats non-qualified (post-tax) annuities differently than other investments. Interest withdrawals from non-qualified annuities are subject to the 10% IRS early withdrawal penalty if you’re under age 59 1/2.
The way around this penalty is to create an immediate annuity with a lifetime income distribution. This strategy can also be used for qualified (IRA, 401K, 403B) money. While you cannot avoid the IRS penalty using a traditional fixed annuity for passive income, immediate lifetime annuities are the workaround for those who have not yet reached age 59 1/2.
Passive Income Later Using Deferred Growth
Fixed-indexed annuities with income riders are extremely valuable investments for those interested in future income. These unique policies offer premium bonuses and guaranteed yearly increases to the income-generating account.
Income rollups can increase the income-generating account by 6-7% or more each year. Additional growth is possible with yearly indexed gains as well. You will know exactly how much future income is available each year as your policy grows. In a high interest rate environment, these accounts illustrate very well.
Annuities For Guaranteed Deferred Income
Deferred income annuities are yet another option. While they may not have the growth potential of a fixed-indexed annuity, they offer guaranteed future income. And cost of living riders can be added increasing future payments each year. Some of these are tied to inflation metrics like the CPI or COLA numbers.
Our clients who want guaranteed future income while also taking advantage of current rates are locking in deferred annuities for the long haul. This ensures large income payments when they are ready to activate their income stream. It also allows for tax-deferred growth in the meantime.
Contact Us For More Information
Hyers and Associates is an independent annuity brokerage with over 25 years of experience. We can help you shop for the best accounts offering passive income now and/or in the future. Contact us today to discuss your best options.
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