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Longevity protection: How annuities safeguard against outliving your savings

by Catherine Silva
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Longevity protection

Are you concerned about outliving your savings? Retirement planning presents a unique challenge due to the unpredictable nature of life expectancy. Even if you’ve saved enough money throughout your lifetime, there is no guarantee that it will last until the end of your expected lifespan. Fortunately, annuities provide a way to safeguard against this risk by creating an extra layer of longevity protection so you won’t run out of money during retirement. 

In this article, we’ll explain how annuities can help protect your assets from running dry as you age and discuss their pros and cons for retirees looking for various types of investment solutions to supplement their income.

What are annuities, and how do they work

An annuity is a financial contract between an individual and an insurance company that can provide a steady income stream over time. Initially, the individual pays a lump sum or a series of payments to the insurance company, which promises to provide regular payments either starting immediately or later. Annuities are designed to be long-term savings plans and often offer tax-deferred growth. 

There are various types of annuities, including fixed, variable, and indexed, each with unique features and benefits. The way annuities work can be complex, but they can serve as a valuable tool for those looking to create a reliable source of income for retirement or other financial goals. Annuity Association – Annuity Reviews can also help investors compare annuity products and choose the one that is right for them. 

Benefits of annuities, such as guaranteed income for life

One of the critical benefits of annuities is that they provide an income stream for life. It means that even if you outlive all your other sources of retirement income, you can still rely on your annuity to provide a steady flow of funds. Annuities can also protect against inflation by providing periodic increases in money paid out over time. 

In addition, annuities also provide a death benefit in the form of a lump sum payment to your beneficiaries if you were to pass away before using up all the funds from your contract. It ensures that any money you don’t spend on living expenses will still be available for your loved ones after death. 

Different types of annuities and their associated risks

Various types of annuities are available to investors, each with its unique features and associated risks. Fixed annuities provide a guaranteed return on your investment, but they also have the potential for low returns due to their fixed rate. 

Variable annuities can offer more significant growth potential since they are tied to stock market performance, but there is also the risk of losses due to market fluctuations. Indexed annuities combine the elements of fixed and variable annuities, offering low-risk growth potential with protection from downside risk. 

It’s important to note that all annuities come with fees, including surrender charges, if you decide to withdraw your funds early or transfer them to another provider. Annuities also generally have restrictions on when and how you can access your money, so it’s essential to thoroughly review the terms of any contract before committing to an investment.

Tax implications of setting up an annuity

When setting up an annuity, being aware of the associated tax implications is essential. For example, most annuities offer tax-deferred growth on contributions, meaning you won’t have to pay taxes on any investment gains until you withdraw your funds. On the other hand, some types of annuities may be subject to immediate taxation upon withdrawal. Additionally, annuities may be subject to estate taxes if you pass away before using up the funds from your contract. 

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It’s essential to consult with a qualified financial advisor or tax professional when setting up an annuity to understand the potential tax implications and develop a retirement plan that works best for you. 

How to choose the right annuity for your needs

When selecting the right annuity for your needs, you must consider various factors, such as risk tolerance, retirement goals, and financial situation. It can also be helpful to seek professional advice from a trusted financial advisor or insurance agent who can help you understand the different types of annuities and determine which is best suited for your situation. 

In addition, it’s essential to read the terms and conditions of any annuity contract carefully before investing. Ensure you understand all the fees associated with the product and any restrictions on when and how you can access your money in the future. 

Strategies for making the most out of your annuity investment

Once you’ve chosen an annuity product that meets your needs, there are several strategies you can use to make the most out of your investment. For example, it’s essential to review and update the terms of your contract periodically to ensure that it still meets your retirement objectives. Additionally, it would help to consider diversifying your portfolio by investing in other types of assets, such as stocks and bonds, to hedge against market volatility. 

Finally, it’s essential to be mindful of inflation when planning retirement. Investing in a combination of fixed and variable annuities with periodic increases can help protect your savings from the effects of inflation over time. With proper planning and disciplined investments, annuities can be a powerful tool for securing your financial future. 

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