Often referred to as the "retirement gap", the money you will receive from your pension, 401k, and/or Social Security may not be enough to support the a comfortable living in your golden years.
A popular option to overcome this gap is an annuity which is a form of investment you make with a sound insurance company. Once you've located an insurance company you are ready to purchase with, your annuity is invested for you and depending on the type of annuity and terms of your contract you may receive regular, guaranteed payments for those investments. One benefit of this approach is that income on annuities is not taxed until it is withdrawn which provides substantial savings power.
Here are some ways an annuity can overcome that retirement gap:
• Some annuities can provide a guaranteed stream of income payments for as long as you are alive.
• There isn't a limit to the amount of money you can install in your annuity and you may contribute in one large lump sum or via scheduled payments although the terms of your contract may restrict the frequency of installments.
• You decide how long and how often you'll get your money sent to you.
• There may be death benefit options that allow you to leave money to your beneficiaries without the costs and delays of probate.
• The gain on annuities is tax deferred; you pay no taxes on what you earn until you withdraw the money. However, distributions taken prior to annuitization are generally considered to come from the gain in the contract first. If your contract is annuitized, a portion of each payment will be considered taxable and the remaining portion will be a nontaxable return of your investment in the contract, which is also called the "basis." Once the investment in the contract is depleted, all remaining payments will be fully taxable. If the contract is taxqualified, generally, all payments will be fully taxable. Distributions prior to age 591/2, may be subject to an additional 10 percent federal tax penalty.
• Since the gain on annuities is tax deferred and they usually offer a competitive interest rate, your money has a chance to grow quickly. Your annuity could, in the end, be worth more than a non-tax-deferred investment that's offering a slightly higher rate of return.
