In finance, annuities are kind of the black sheep of retirement planning vehicles. Not because they’re awful. And not because they’re not useful. But because people just don’t talk about them. The answer to the question “How do annuities work?” ultimately boils down to “You pay in and receive cash every month after you retire.”. Sound too good to be true? Can an annuity actually help you get ready for your retirement? We’ve put together a list of four advantages of annuities that you won’t want to miss. Just keep reading to find out more.
1. You Can Choose Your Investment Options by Outcome
Generally speaking, there are two types of annuities. Fixed-rate and variable-rate.
With a fixed-rate annuity, you get a set payment no matter what’s happening in the stock market. In contrast, a variable annuity will change from month-to-month depending on how your investments are doing.
The viability of one or the other may depend on details like whether you have other sources of retirement funds. But when you’re buying an annuity plan, you can skip the “How do I choose stocks?” part and get straight to talking results.
2. You Don’t Have to Worry About Contribution Limits
The nice thing about IRAs is that you can use your contribution room to get a larger tax return. But even so, there’s still a catch:
You have contribution limits. And according to the IRS, once you’ve maxed out your IRA contribution room for the year, you don’t get another bite at the apple even if you’ve got money to spare.
With an annuity, you can take those extra dollars and add them to your savings. And although you may have to learn more about your early withdrawal options if you need cash sooner, your annuity contributions won’t bother the IRS.
3. The Growth of Your Annuity Is Tax-Deferred
Speaking of tax-related annuity benefits, with these plans you can let your investments grow without having to share with the IRS every year. In light of historical market returns, that’s a solid chunk of cash if you buy your plan early.
Once you start receiving payments you’ll be expected to pay taxes. But once you hit the right age to cash in on annuity, your structured plan will have had years to grow tax-free.
4. You Can Get Paid for the Rest of Your Life
The stock market is known for its crazy highs and crazy lows. If you plan to survive in retirement by withdrawing small amounts from your investment accounts, you’re always one bad crash away from seeing the value of your portfolio take a dive.
One of the benefits of annuities, particularly if you opt for a fixed-rate plan, is that you can receive steady payments no matter what the stock market is doing.
Here’s What You Need to Know About the Advantages of Annuities
After you leave the workforce, you don’t have the security of getting a steady paycheck. One of the major advantages of annuities is that they can give you a steady income stream throughout your lifetime.
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