If you have been saving diligently for your retirement, you might think you have enough money to get by on. But what if something goes wrong? What if a medical emergency leaves you unable to work and living off of your savings becomes impossible? Medical bills, especially during old age, can be astronomical. You need to protect yourself from possible bankruptcy. The best way to do that is by purchasing an annuity.
An annuity is a contract with an insurance company in which they make regular payments to you in return for a sum of money. It’s like making deposits into a bank account every month, instead of getting one hefty withdrawal when you retire. You can think of it as financial protection insurance. When the unexpected happens, you’ll be glad you have an annuity. Here are some vital ten reasons why you might need to buy one.
Nearing Your Retirement Age
If you are getting closer to retirement age and your regular savings aren’t enough to meet your retirement goals, an annuity might help you bridge the gap. For example, if a man retires at age 65 with $100,000 in savings spread across stocks and bonds which generate about 3 percent return each year, his savings will grow by about $3,000 per year. If he wants to have as much as $5,000 per month available for spending, then he would need at least $150,000 in his investment account. An annuity could provide that extra income when you are planning for retirement until those stock and bond investments can kick in. If your investments aren’t generating enough of an income to meet your retirement goals, while still being safe from market volatility, then an annuity can provide that income for you. You can choose the terms of your annuity to make sure that they are compatible with your investment strategy.
When You Need Extra Cash Now
Annuities are also good for when you have an unexpected need for cash. If you have a medical emergency, for example, or if someone in your family needs some help with living expenses, you’ll be glad you had some extra income coming in on a regular basis. When it comes to budgeting, annuities are easier to manage than one big lump sum payment because the money is spread out over time. You won’t even notice it’s there until it’s time to spend it.
An Unstable Retirement Savings Fund
If your savings are invested in the stock market, then there is no guarantee that they will continue to grow at a steady pace year after year. A bear market, which is what occurs when stock prices drop significantly, could create months or even years where your money doesn’t increase in value. An annuity is less risky than having all of your money tied up in stocks because it provides an income whether the market goes up or down, thus avoiding large losses.
You Need a High Rate of Return to Your Savings
Many people invest their money in high-interest savings accounts, certificates of deposits, or stocks and bonds, but those investments don’t typically provide as consistent a rate of return as annuities. For example, if your goal is to save $100,000 for retirement, and you needed that money to generate $5,000 in income each year that you’re retired, then you would need to find an investment that pays approximately 5 percent interest each year. If stock market returns average about 10 percent per year and 30-year U.S. government bonds currently pay around 4 percent per year, then you might consider an annuity, so you can achieve the targeted return on your savings.
You Want More Predictable Income Each Year
If you don’t want a lot of hassle, and you’re looking for a simplified approach to your retirement savings plan, then an annuity might be a good choice for you. When you buy an annuity, the insurance company agrees to make regular payments to you each month or each year until the end of its term. In return, they take ownership of most or all of your investment savings with them, so you don’t have to worry about market fluctuations
If You Have Too Many Assets
Have too many assets? Depending on where you live, that may not be great news when it comes down to qualifying for Medicaid benefits if something were to happen. To qualify for Medicaid in some states, single people can only have $2,000 worth of assets, while married couples are allowed to have $3,000. You can protect your savings by using your assets to buy an annuity.
You Need Guaranteed Income for Life
An annuity allows you to choose the amount of money that you want the insurance company to pay you during its term (typically 10-20 years) and then receive income for life after that The income payments are guaranteed not to decrease even if the stock market or interest rates fall sharply. And if your spouse outlives you, he/she will continue receiving income payments as well; they won’t stop just because you died. Also, most annuities don’t require any additional fees beyond the cost of purchasing it like there is with most mutual funds, so all of your investment earnings go toward providing income for you and your spouse if you choose to design your annuity that way. You can find the guaranteed amount of income your money will provide during its term by looking at a “single life expectancy number”
You Want to Pass on Your Savings
An annuity is a good way to pass along some of your savings to heirs. Insurance companies payout up to 90% of the purchase price as estate or inheritance tax-free, depending on state law and federal regulations governing life insurance policies. Also, the IRS only taxes the dollars that you used to buy an annuity; it doesn’t tax future income earned on those dollars.
You Want a Guarantee That Your Savings Will Be There When You Need It
When you purchase an annuity, your insurance company takes ownership of most or all of your savings and invests that money for you. They guarantee that they will pay you at least what you paid for it (plus interest) back when the agreed-upon term is over. If their investments don’t grow enough to provide at least what you originally paid, then they will add more money to make up the difference so your guaranteed rate of return stays intact.
Annuities are good investment vehicles to provide a stable income for retirement years. A traditional fixed annuity provides a guaranteed base income, while an indexed annuity provides the potential to achieve higher returns based on market conditions during its term.