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Retirement Income
O'Brien Senior Benefits offers a service that helps retirees and seniors plan their retirement income, including developing a strategy to ensure you have enough income to support your lifestyle throughout retirement.
This can involve assessing your sources of retirement income, estimating your expenses, and creating a plan to maximize your retirement income while minimizing your expenses. At the core of this assessment is a discussion of Social Security and pension income, RMDs, and adding an annuity to provide a steady, predictable stream of income that protects against outliving your savings and grows tax-deferred.
What Are Annuities?
An annuity is a financial product that provides a stream of income to the investor over a specified period of time, typically for the rest of their life. Individuals often purchase annuities to secure a steady income during retirement. The investor makes either a lump-sum payment or a series of payments to an insurance company, and in exchange, the insurance company agrees to make regular payments to the investor.
Annuities can be structured in different ways, with different options for payouts, riders, fees, and other terms. There are various types of annuities, including fixed annuities, variable annuities, and indexed annuities, each with its own unique features and benefits.
Why Consider An Annuity?
There are several reasons why an individual might consider purchasing an annuity:
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Guaranteed income: An annuity provides a guaranteed stream of income for a specified period or for the lifetime of the annuity holder, which can provide a sense of financial security in retirement.
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Tax-deferred growth: Annuities offer tax-deferred growth, which means that the earnings on the annuity are not taxed until they are withdrawn. This can help maximize the investment's growth potential and potentially reduce tax liabilities.
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Estate planning: Annuities can be used as a tool for estate planning, allowing the annuity holder to pass on assets to beneficiaries while avoiding the probate process.
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Diversification: Annuities can be a useful tool for diversifying an investment portfolio, providing a fixed or variable return that is not directly tied to the stock market or other investments.
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Longevity protection: For individuals who are concerned about outliving their retirement savings, an annuity can provide a reliable source of income for the rest of their life, no matter how long they live.
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Flexibility: Annuities can be structured in a variety of ways to meet different needs, including variable annuities that allow for greater investment flexibility, and deferred annuities that allow for contributions over time.
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Protection against market volatility: Fixed annuities provide a guaranteed rate of return and protection against market downturns, which can be particularly appealing to investors who are risk-averse.
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Optional riders: Many annuity contracts offer optional riders that can be added for an additional fee. These riders can provide additional benefits, such as long-term care coverage or death benefits for beneficiaries.
Options to Fund An Annuity
There are two options for funding an annuity: qualified money or unqualified money. Each has its own set of rules.
Qualified Money
Qualified money refers to funds that have certain tax advantages, such as tax-deferred growth or tax-free withdrawals, depending on the type of account they are held in and how they are used.
For example, retirement accounts like 401(k)s, 403(b)s, and traditional IRAs are considered qualified money because contributions are often tax-deductible, and investment earnings are tax-deferred until withdrawal. However, when the money is withdrawn from these accounts in retirement, it is typically subject to income taxes.
Non-Qualified Money
Non-qualified money refers to funds or assets that are not eligible for certain tax advantages or special treatment under the tax code, as opposed to qualified money.
Examples of non-qualified money include regular savings accounts, checking accounts, and brokerage accounts that are not designated as tax-advantaged retirement accounts. Any income generated from these accounts, such as interest, dividends, or capital gains, is subject to taxation in the year it is earned.
Different Types of Annuities:
There are several different types of annuities available, each with its own unique features and benefits. Here are some of the most common types of annuities:
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Fixed annuity: A fixed annuity provides a guaranteed rate of return, typically for a specified period, and is not directly tied to the stock market or other investments. Fixed annuities offer a lower risk profile and are often chosen by risk-averse investors who are seeking a steady source of income.
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Variable annuity*: A variable annuity is invested in a portfolio of stocks, bonds, or other assets, and the rate of return is based on the performance of the underlying investments. Variable annuities offer the potential for higher returns than fixed annuities, but also come with greater risks.
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Indexed annuity*: An indexed annuity is a type of fixed annuity that is linked to the performance of a stock market index, such as the S&P 500. Indexed annuities offer the potential for higher returns than traditional fixed annuities, while also providing some protection against market downturns.
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Immediate annuity: An immediate annuity provides payments to the annuity holder immediately after the initial payment is made. These payments continue for a specified period or for the lifetime of the annuity holder, depending on the terms of the contract.
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Deferred annuity: A deferred annuity allows the annuity holder to make payments over time and accumulate funds, with payments starting at a later date. Deferred annuities can be either fixed or variable, depending on how the funds are invested.
It's important to carefully consider the features and benefits of each type of annuity, as well as the associated fees and charges, before making an investment decision. Consulting with O'Brien Senior Benefits can help you determine which type of annuity is the best fit for your individual financial situation and goals.
*Note: Variable and indexed annuities are linked to the performance of the stock market and can only be sold by an individual who has a Series 7 license. As I do not have a Series 7 license, my focus is on the safer, more stable fixed, immediate, and deferred annuity types. If you decide on a variable or indexed annuity, I work with a partner who can help with those.
Social Security and Retirement Benefits
Social Security retirement benefits are a form of income provided by the US government to eligible retirees. To be eligible for Social Security retirement benefits, individuals must have worked and paid Social Security taxes for a certain number of years, and must be at least 62 years old. The amount of the benefit payment is based on the individual's earnings history, and the longer an individual waits to claim their benefits, the higher the benefit payment will be.
Social Security retirement benefits can provide a significant source of income for retirees and help supplement other sources of retirement income, such as pensions, annuities, and personal savings. It's important to carefully consider when to claim Social Security benefits, as the age at which an individual begins receiving benefits can impact the amount of the benefit payment.
Individuals can apply for Social Security retirement benefits online, by phone, or in person at a Social Security Administration office. It's important to have the necessary documents and information, such as birth certificates, Social Security numbers, and earnings records, when applying for Social Security benefits.
Terri O'Brien
Your Local Medicare Advisor
