No matter how old you are, thinking about retirement is essential. Not only is employment changing — with more people being self-employed, it’s less likely that you’ll have a cushy pension to fall back on after you retire — but the very existence of retirement benefits like Social Security may not be as stable as we believe.
It’s crucial that you think about how you’re going to support yourself after you retire. Also, it’s more important to have this conversation with yourself at a younger age. That’s because it gives you more time to prepare thoroughly. This is better than realizing just a few years before you retire that you don’t have a plan for how to proceed. Also, funds invested years earlier will grow larger given more time, ensuring that you have as much money as possible by the time you decide to retire.
One type of retirement savings option is an annuity. This is an incredibly helpful tool that can make the difference between a comfortable retirement and a stressful one.
An annuity is a sum or series of payments that you will receive after a specific date. You pay for it for earlier by drafting an agreement with a third party, such as an insurance company. You start by paying a lump sum, and in return, the insurance company will grow your assets and then pay you an income for a period that you decide, or for the rest of your life after a certain age.
The annuity will also include a death benefit paid to your family as well as long-term care benefits. These benefits may become necessary depending on the state of your health later on in life.
Time-wise, annuities can be divided into two categories: life annuities and period-certain annuities. A life annuity is meant for unmarried people who want to receive automatic monthly payments for the rest of their lives. These payments stop upon their death. Period-certain annuities, meanwhile, continue for a fixed period (usually 10 to 20 years), even if the participant and their spouse die before it expires. At that point, the annuity will be paid to a beneficiary, like a child or an heir.
If you’re looking for the most flexibility possible, you can purchase an annuity that provides for both possibilities. It is called a life annuity with period certain. This means that the annuity will either last for life or for the specified time — whichever lasts longer.
There are two kinds of annuities: fixed and variable. Fixed annuities guarantee the principal on your investment and pay out a pre-determined sum each time. This means that your gains are not influenced by interest rates or current market fluctuations, which many see as the safer and less risky option. That’s why fixed annuities are excellent as an insurance policy rather than an investment.
There are several types of fixed annuities. First are immediate annuities (which start paying income in less than one year). Next, you have deferred annuities (which begin paying after one year), then multi-year guarantee annuities (which last for a particular time and pay the same interest rate each year). Finally, there are indexed annuities (which increase in value depending on how a particular index performs — like the Dow Jones or the S&P 500).
Variable annuities, on the other hand, will pay you a different amount depending on how your initial account performs. As such, they’re not necessarily as stable as fixed annuities and are meant to be an investment that involves some amount of risk. However, the potential reward is higher as well.
You can purchase some annuities in the form of spousal benefits, which will be paid to the surviving spouse upon the death of the annuity participant. These typically are between 50 and 100 percent of the annuity that the participant receives. They can also be waived in place of a lump-sum payment (as long as the participant’s spouse consents and the transaction has a specific witness).
There are two types of spousal benefits. First, there is Qualified Pre-Retirement Survivor Annuity (which provides payments to the spouse before they retire if the participant dies before retiring). Second is the Qualified Joint and Survivor Annuity (which is more typical, as it provides a life annuity to the person purchasing the plan and survivor benefits to the spouse).
This second type of spousal benefit makes payments from a specified plan or 403(b) account. However, it can also apply to other plans, like profit-sharing, and 401(k) plans. You need to specify the type of program when you sign up for the annuity.
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