When you are planning your retirement, there are many investment opportunities to help you ensure an income after you stop working. One type of investment is called an annuity. This type of investment is usually purchased either in a lump sum or via an investment plan where you put money into the annuity over time for many years. The minimum investment is often 5 to 10,000 dollars to get started. So, how can you know that a retirement annuity is right for you?
How Old Are You?
Most financial planners believe that between the age of 45 and 55 is the perfect time to purchase an annuity. However, if your family typically has a very long lifespan, it’s better to wait longer, saving the money and putting the lump sum into an annuity when you’re around 70 years old to qualify for the maximum payout each month.
Are You in a High-Income Tax Bracket?
If you are a high-income earner and pay the maximum in income taxes, this is a great way to defer taxes on the money until retirement when technically you may be making less income due to not working so your tax liability will go down. This can be a very good thing to do to save money on taxes.
Are Your 401K and IRA Contributions Maxed Out?
Before considering investing in an annuity which doesn’t have as good of a rate of return as other investments (due to the safety of it), ensure that you are first maxing out your 401K contributions. If you do have funds left over for investing, that is a good time to consider a retirement annuity.
Do You Have Consumer Debt?
If you have consumer debt, you will earn more on your dollar if you just pay that off instead of investing in an annuity – or anything else for that matter. Most credit cards are about 14 percent interest today. You’re not going to earn 14 percent interest on any other type of investment.
Can You Live without the Cash in an Emergency?
If you don’t have other savings to use in an emergency, it’s not a good idea to invest in an annuity, even if you will receive income from it right away. The main reason is that the penalties are high for trying to access the cash in the account and it’s not worth it at all.
Are You Willing to Contribute for Years?
You need to invest a lump sum of at least $5 to $10,000K to start an annuity, and then usually contribute equal monthly contributions to build up the annuity until retirement. If you’re not willing to build up the fund to at least $100K, you may be wasting your time with the annuity.
Do You Have a Lump Sum You Want to Defer?
If you receive an inheritance, a lottery winning, bonus or other lump sum, especially if it’s unexpected, you owe no consumer debt, and are already maxed out on other investments and savings, then an immediate annuity might be a really good choice to keep the money save and give yourself an income for life at the same time.
Finally, you will pay ordinary income tax on the earnings portion of your payments. If you’re ready to do all that and you have decided that an annuity is for you, then that’s great. You can find out more about annuities from your financial institution or insurance agent.