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Annuity & Retirement Planning

Annuity & Retirement Planning

Be honest. When you see the word “annuity,” does your brain quickly look for an escape route to a more enjoyable topic? That’s OK. I won’t take it personally. And annuities can be tough sledding. But properly understood and used, annuities can be a great addition to a retirement plan. The first thing to understand is that annuities are essentially contractual obligations from insurance companies. In exchange for funds you provide to the insurer, which are paid into the product during what is called its build-up phase, you are provided certain things that are spelled out in your annuity contract. The most basic promise is the insurer’s commitment to make regular payments to you. This is known as the annuitization phase of the product. The payments begin at a specified time and usually last for the rest of your life or, depending on the specifics of your annuity, the rest of your spouse’s life as well.Second, money put into an annuity contract can grow tax-free until funds are withdrawn. If funds are withdrawn during the build-up phase, or because the annuity has been terminated early, it is assumed that any earnings that have accumulated in the annuity are withdrawn first, and taxed as ordinary income. Assuming the annuity & retirement planning was funded with post-tax dollars, the return of those initial funds is considered a return of principal (remember, this is an insurance product) and is not taxed. Once regular payments have begun in the annuitization phase, they are treated as a blend of earnings and return of principal, and taxed accordingly.When you purchase an annuity in washington, the size of the ultimate payments you will receive depend on several basic factors: how much money you’re putting into the contract, how old you are, and how far off the beginning date is for payments to begin. The insurer knows, on average, how long you’re going to live. And it also knows how much money it expects to earn from the funds you’ve placed into the annuity contract.Annuities can be bought and activated right away or over time. In the case of an immediate annuity, the insurer’s stream of payments begins right after it has received your money. In a deferred annuity, the payments don’t begin until a future date specified in your agreement. You can fund an annuity with a single, lump-sum payment or with periodic payments.A fixed annuity provides you the promise of fixed payments over time. A variable annuity (VA) places your money into investments that you can control. Most often, those investments are in mutual funds. Your subsequent VA payments will be influenced by the performance of your investments. There also is a type of fixed annuity known as an indexed annuity. It provides you performance guarantees that are linked to the gains in a common index, such as the S&P 500 index. You would be able to enjoy some of the upside of having your funds invested in the stock market, but you wouldn’t need to actively manage these investments.