Using annuities in your retirement planning
As we move into April, I had planned to start a series of articles on Investing in Equities. Instead, I want to provide information on using annuities in your retirement planning, including benefits and risks. My motivation was learning that a long time insured who has moved out of state has run out of money and is being supported by her children. Studies show that the consistent #1 concern of the baby boomers is running out of money.
The last 10 years has seen very extreme swings in the financial markets. To go along with this volatility, traditional retirement plans such as Defined Benefit Pensions, continue to fade away. This places a greater responsibility on us to save for retirement and protect our savings at the same time. Annuities can be very beneficial to you in your retirement planning.
Simply stated, an annuity protects against the risk of living too long and potentially outliving your money. Annuities can be purchased with either a single premium or a series of premiums. They can be used to fund IRA’s, other tax-qualified plan and also non-qualified plans.
One of the major benefits of an annuity, particularly non-qualified, is how it is designed to work. The annuity will provide triple compounding:
1. Interest on your principal 2. Interest on interest 3. Interest on taxes deferred into the future
No less an authority than Albert Einstein declared that “compound interest is the most powerful force in the universe”. My suspicion is that he would have done quite well in Mrs. Burke’s senior math class at Newton back in the 1960s.
IRA’s can also benefit from an annuity being a part of the account, particularly if you want to leave a legacy, whether it is for your spouse, children or grandchildren. If funds aren’t needed, using distributions or RMDs to fund a life insurance policy will change a fully taxable asset into a tax-free benefit in the future.
One of the leading business schools, the Wharton School at the University of Pennsylvania, has determined that lifetime income annuities “are the most cost-effective and least risky investment for creating retirement income for life”. That’s a very solid endorsement for using annuities as part of your retirement plan.
Having outlined several of the very strong benefits of annuities, you’re probably thinking that I recommend nothing but annuities in retirement plans. Nope! While these products bring some great benefits to the table, other products have some very strong points also.
In future articles, I’ll review the various annuities currently available along with the positives and negatives of owning a particular type.