Dollars and Sense

Fixed annuity could extend lifespan of retirement accounts

Editor’s Note: “Dollars and Sense” is a new column in the Quail Creek Crossing dedicated to financial issues. This column is designed to provide accurate and authoritative information on the subject of personal finances. The publisher shall not be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential or other damages. As each individual situation is unique, questions relevant to personal finances and specific to the individual should be addressed to an appropriate professional to ensure that the situation has been carefully and appropriately evaluated. Robson Publishing, a division of Robson Communities Inc. is not liable for information contained in these articles.

Jeff LeFave

It’s almost impossible to save too much for retirement. After all, you could spend for two or even three decades as a retiree. And, retirement is not cheap. Even if you maintain a relatively modest lifestyle, some of your expenses, especially those involving health care, may continue to rise over the years. Consequently, you will need several sources of reliable income, one of which might be a fixed annuity.

Fixed annuities are essentially contracts between investors and insurance companies. When you purchase a fixed annuity, the insurer will guarantee the principal and a minimum rate of interest. This means the money you invest in a fixed annuity is designed to never to drop in value. However, this guarantee is based on the claims-paying ability of the insurer that issues the annuity.

You can structure a fixed annuity to pay you for a certain number of years or for your entire lifetime, which is the route many people choose. This is advantageous not only because of what it provides you – income for life – but also because it may allow you to take out less money each year from your other retirement accounts.

Here’s some background. Once an investor turns 70 1/2, you generally are required to begin taking withdrawals from any traditional IRAs, 401(k)s or similar employer-sponsored retirement plans that you own. (This requirement does not apply to Roth IRAs.) Investors usually need to take out a minimum amount, based on their age and account balance, but you are free to exceed that amount each year. But the more you withdraw from these accounts, the faster they are likely to be depleted. So, when you reach retirement, it’s a good idea to establish an appropriate annual withdrawal rate, based on your retirement plan balances, Social Security, lifestyle, longevity expectations and other factors. You may want to work with a financial professional to determine a withdrawal rate that’s suitable for your needs.

If you can count on the income from a fixed annuity, you might be able to take out less each year from your traditional IRA and 401(k), giving these accounts more tax-deferred growth opportunities. Plus, if you don’t withdraw all the money from these accounts during your lifetime, you may be able to include the remainder in your estate plans.

A fixed annuity’s potential to help you extend the lifespan of your IRA and 401(k) might be of value to you. Still, a fixed annuity does carry some issues about which you should be aware, such as surrender charges for early withdrawals, along with other fees. Also, if you take withdrawals before you reach 59 1/2, you likely will face a ten percent penalty. And, annuities can have tax implications, so before you start taking withdrawals, you will want to consult your tax advisor.

Is a fixed annuity appropriate for you? There’s really no correct answer because everyone’s situation is different. However, if you consistently max out your IRA and 401(k) contributions and you still have money left to invest for retirement, you might want to think about an annuity. An income stream you can’t outlive, which may help you protect your other retirement accounts, is worth considering.

Edward Jones is a licensed insurance producer in all states and Washington, D.C., through Edward D. Jones & Co., L.P., and in California, New Mexico and Massachusetts through Edward Jones Insurance Agency of California, L.L.C.; Edward Jones Insurance Agency of New Mexico, L.L.C.; and Edward Jones Insurance Agency of Massachusetts, L.L.C.

This article was written by Edward Jones for use by your local Edward Jones Financial Advisor.