In retirement, you are moving from the accumulation years to the spending years. You’ve put money away your entire working life for retirement and now you need a plan for how to make this money an income.
Annuities are one place to put your money in retirement. Not only are they safe, but they can create a guaranteed income that lasts throughout your life.
There are 3 types of annuities we recommend for retirees.
1. Accumulation Annuity
Accumulation annuities are designed to grow your money. These are a little different than the other 2 types of annuities we talk about, as most do not end with income payments.
The most common type of accumulation annuity we sell is a MYGA, or a Multi-Year Guaranteed Annuities.
MYGAs, sometimes called “CD Annuities”, offer you a guaranteed interest rate for a set period of time, typically 3-10 years. Interest rates for MYGAs are going to range anywhere from a little over 1% to over 3.5%
There are no hidden fees; you will see up front how much your money will be worth at the end of the term and the fees are included in this. MYGAs fully protect your principal from loss.
With MYGAs, once you transfer over a lump sum of money, which can range anywhere from around $15,000 to a max of $1,000,000, you just leave it there until the end of the term.
After the term of the accumulation annuity is up, you have the option to withdraw the money, renew the contract, or possibly convert it into an income stream.
Most retired clients we see have a significant amount of money just sitting in their savings account “just in case”. It is typically more money than you would need for an emergency situation.
For these clients, MYGAs work perfectly, as it gives them a place to put their money where it will be safe, they can possibly have access to it, but it will grow to keep up with inflation.
2. Deferred Income Annuity
Deferred income annuities make up the bulk of the annuities we sell to retirees as they create an almost pension-like income in retirement.
You put money in the annuity, leave it until you need an income, and then you turn it on. Once on, it guarantees an income stream for the rest of your life.
If you choose a joint or survivor version of these annuities, the payments can even continue until the second spouse in a couple dies. This is a great option for couples who want to make sure the surviving spouse has enough money to live off of, especially with one Social Security check going away.
You can also choose how often you receive payments from these annuities. While most people are going to choose monthly payments, some choose quarterly or even yearly payments.
These annuities are simple, they basically are a “get it and forget it” product. You do not need to watch markets or regularly track the rates, which is great for retirees.
3. Immediate Income Annuity
Immediate income annuities are basically deferred income annuities without the waiting period. These annuities start paying you right off the bat, kicking out an income that pays for the rest of your life.
These work great for people who have already retired and maybe didn’t fully plan their finances before they retired. They get to retirement and realize they need a way to start distributing their savings right now. Immediate income annuities can do this for them.
These annuities are going to give you guaranteed payments and you can choose how often you want these payments (monthly, quarterly, yearly).
There are different immediate income annuity products, so make sure to shop around, or work with a broker, and get one that works for your situation.
Using IRA money to fund annuities
Another great thing about annuities is that you can use your IRA to fund them.
IRA’s were specifically designed to make sure that Americans had money to live off of in retirement. If you are planning on using the money in your IRA for something else, there is probably a better place to put it.
If you are in a place where most of your money is in an IRA, a simple way to create an income is to roll some of this money over into an annuity.
If you do this the correct way, you could also lessen your tax bill, as it will be spread out over the years with your payments.
Fixed vs. Variable Annuities in Retirement
There are other classifications of annuities, such as fixed and variable annuities.
A fixed annuity is going to give you a specific payment at a future date. You are going to know exactly the amount you will receive.
Variable annuities base future payments on the performance of the funds that your money is invested in, meaning you will not know the exact amount you will receive in the future.
The 3 types of annuities we described above are fixed annuities. We offer very few variable annuities since most retirees need to be able to plan their retirement income and keep their money safer.
For most people, a combination of products, even multiple types of annuities, is going to be their best best for having a secure retirement income.
We would never recommend putting all of your money into an annuity; the real key to a successful retirement is diversification.
At Cardinal, we represent over 30 insurance companies,so we will be able to find an annuity that fits your budget and needs.