Guaranteed Retirement Income and Annuitization
Annuitization is essential to creating a guaranteed stream of income, and yet, it is one of the most misunderstood financial concepts. Annuitization is the process of converting a pension or an annuity value into a stream of regular payments. Eligible 401(k) and 403(b) funds can be transferred into annuity to create a guaranteed stream of income. Ask a financial advisor to help you to select an insurance company and a product that is suitable for you and can meet your needs.
Both pensions and annuities can use annuitization to generate a guaranteed stream of income for life, BUT – many don’t understand how it works. If not done properly, a pension or an annuity annuitization can lead to serious irreversible consequences. Annuitizing an annuity or a pension for "lifetime income only" without a beneficiary (“life-only” or “straight life” option) creates an irrevocable contract that can lead to a total loss of remaining funds upon death. There are other ways to take money from an annuity, and if an investor passes away, their remaining money in the account can go to the beneficiary or beneficiaries. For example,adding an additional feature sold as “guaranteed income rider” to an annuity will add more flexibility and liquidity. When activated, this rider will provide a guaranteed stream of income and ensure that all unused funds will go to beneficiaries.
Typically, annuity should not be the only source of income. Only one portion, no more than 50% of all investable assets, should go into annuity.
Although annuities are powerful retirement income planning tools designed to provide a stream of guaranteed income, properly structured annuities can also be used to provide enhanced payouts if the owner needs long term care. It’s becoming increasingly difficult to cover risks associated with the cost of LTC with conventional LTC insurance policies. Using an annuity to self-insure for long-term care (LTC) allows you to use a single premium payment from an existing annuity to pay for care, often without medical underwriting.
Annuities also serve as effective estate planning tools. They offer tax-deferred growth, bypass probate, and provide death benefits to beneficiaries. Annuities cannot replace living trusts because they serve different purposes. A charitable gift annuity (CGA) could be one of the easiest tax-efficient ways to support your philanthropic interests in exchange for a fixed income for life.
Annuities are often misunderstood. Understanding annuities is critical for securing reliable retirement income and using them effectively for long-term care and estate planning purposes. If you would like to receive an Annuities – Common Misconceptions and Mistakes factsheet, please click on the link to request this financial literacy piece. https://www.wmsguide.com/contact.