The word "annuity" doesn't exactly roll off the tongue, does it. Why do financial terms have to be so bizarre? That's an excellent question--one we can't answer without first teaching you a secret handshake. Despite the strange term, annuities are a popular retirement tools today. You may want to gain a better understanding of how you could use them in your overall retirement plan.
Think of an annuity as one of the tools in the retirement shed. It may not be the sharpest tool in the shed, and you can get by without it--if you've got other tools that serve a similar purpose. An annuity has many features, but it's generally not the first tool you show off when bragging about your tool shed. And you probably won't use the annuity tool for awhile, but when the time comes you’ll be glad you have it.
OK, enough with this metaphor. Is there such a thing as a genuine tool shed anymore? Maybe everyone gets one when they retire. There we go again.
Annuities may be just the tool for you because:
- They can supplement monthly retirement income from IRAs and 401(k) plans or other employer-sponsored retirement plans. Annuities can be a good way to arrange for a monthly income during retirement (or you can collect a lump sum). Some annuities will even guarantee a monthly pay-out for as long as you live, no matter how long you live.
- You don't pay income taxes on the accrued interest until you withdraw money from the annuity. However, the contributions themselves--your non-qualified annuity premiums--are not deductible at the time of contribution.
- Pay-outs can begin immediately after you open the annuity or can be deferred until a later time when you need income.
- With some annuities, you can pass on death benefits to your beneficiaries.