If you’ve ever worried about outliving your savings, you’re not alone. A recent study found that 67 percent of Americans indicated they would be willing to give up smaller pay increases in exchange for steady and reliable income in retirement. In the same study, 78 percent said the disappearance of pensions has made it harder to achieve the American dream.1
With pension offerings on the decline, you may want to consider a fixed income component to your financial strategy. In short, adding an annuity may be an opportunity to help ensure a portion of your income will be guaranteed for life.
An annuity is a contract between a policyholder and an insurance company. In a fixed annuity, the insurance company guarantees a contract owner’s principal from stock market losses and pays interest based on the terms of the contract. When a policyholder is ready to receive income distributions, annuities offer a variety of payout options, which may include a lump sum, free withdrawals and income for life.
Most annuities have provisions that allow contract holders to withdraw a percentage of the value of the contract each year up to a certain limit (called a free withdrawal amount, which is typically 10 percent per year). Most deferred annuities are liquid, but withdrawals above the annual free withdrawal amount will typically incur a “surrender fee” during the initial term of the contract (typically the first five to 15 years).2
1 The National Institute on Retirement Security. “Retirement Security 2015: Roadmap for Policy Makers – Americans’ Views of the Retirement Crisis.” March 2015.
2 Annuity withdrawals made before age 59 ½ may be subject to a 10 percent penalty fee, and all withdrawals may be subject to income taxes.
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