Retirement Income Blog

If you don’t plan where you’re going, you’ll probably get there.  To have the comfortable retirement you desire, you need to plan ahead.  In 60 minutes using this retirement planning checklist, you can lay the groundwork for the retirement you desire.

How do you want your retirement to look?

What is your average day?  Where do you live? Do you work and if so, at what? Do you volunteer? Where? Do you see family members, friends, how often.   Do you take vacations?  How often and to which places.  Develop a clear picture of what you want your retired life to be.  This retirement planning checklist will be of greatest value if you take the most time on this step—actually defining what you want and putting it on paper.

Calculate expenses

This is most easily done with an Excel spreadsheet

Given the picture you created above of your retirement, list all of your expenses—everything from food to rent to vacations to health care , long term care insurance (use the long term care calculators to get cost) and total for the year.  Now you know how much you need.  On to the next step of our retirement planning checklist.
Take stock of retirement income sources

Of the expenses you calculated above, what income will you have in retirement?  Go to the social security web site ssa.gov to get the estimate of your social security benefits.  Will you have pension or other income or income from work?  Also, from your investment assets, be conservative and assume you will withdraw 4% annually.  For example, if you have a retirement nest egg—retirement accounts such as IRA, 401k and other investments of $500,000, assume you will withdraw $20,000 annually.  This seemingly conservative assumption will insure that the pot lasts through your lifetime.  Now you have the total income you have in place to offset the expenses above.  Subtract the two.  If you have a deficiency in income, that’s okay for now.  We address that in the next section of our retirement planning checklist.

Fix the Gap between income and expenses

If you have time until retirement, you can fix the gap by saving more and reducing your current expenses.  If you’re close to retirement, then you can save more by working longer or you can close the gap by reducing retirement expenses (e.g. living in a less costly area, reducing annual vacations from three to one.  Or you can work part time in retirement.  You do have choices.

Make a time line

Put it on paper.  By when will you have saved your targeted amount, what is your retirement date.  When will you starting your search for part time work.  If moving, when do you put your house up for sale?  All of the items listed in your retirement picture in step 1of the retirement planning checklist list by date to start and complete.

At this point, don’t obsess about smaller issues that you can address once retired like tax and estate planning, selecting specific vacation destinations (unless you know them now), the investment choices for your portfolio.  These can follow in the first few weeks after retirement.

 Learn more, have a more comfortable retirement.
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While most tax rules and tax rates apply equally to all taxpayers, there are some tax law provisions that are particularly senior tax issues because seniors are the ones most affected.  Below are a few senior tax issues and an offer to get a more comprehensive booklet if interested.  Some minor tax planning in retirement can result in big saving as you shall see.

Immediate Annuities Help Retirees Reduce Tax
Immediate annuities pay a monthly income and few people below age 60 buy immediate annuities as younger people usually derive their income from working, not from investments.  The senior tax issue here is the exclusion ratio.  For every immediate annuity payment, a significant portion is not subject to tax.  This exclusion ratio means that from each payment, a retiree has more spendable income than from alternate investments.

Immediate or Deferred Annuities can reduce the senior tax on social security income
Since people age 62 and over pay tax on social security income, we can refer to this as a senior tax. The ways to reduce income tax on your social security income is by moving money from items that increase the income tax on your social security income negatively (CDs, bonds, tax free bonds, savings bonds) to deferred annuities or immediate annuities.  Since none of the reinvested interest from a deferred annuity appears on your tax return, the income on your tax return is lower and thus, this will reduce or eliminate tax on your social security income.  This senior tax is also impacted favorably by the ownership of immediate annuities because a large portion of the monthly payments are excluded from reporting on your tax return making immediate annuities a superb source of supplemental retirement income.

Slow down IRA distributions
Since only people that have reached age 70 1/2 must take IRA distributions, the taxation of these withdrawals is certainly a senior tax issue.  Some retirees may be taking more than the IRA required mandatory distribution.  Even if you need the income for living expenses, you will lower your tax by reducing your IRA withdrawals to the IRS required minimum and spending principal from your non-IRA assets to live on.  Although the spending of principal is taboo for many retirees, there is no difference between principal and income. It’s all green money and this recommendation will reduce the senior tax on your IRA.  This dovetails with our next senior tax issue.

Spend your regular money first
The order in which you spend your different pots of money in retirement affects your taxes.  As hinted above, if you take $1 from your IRA, you only have say 70 cents to spend because you must pay income tax on the IRA withdrawals.  However, if you withdraw a dollar form your savings account, whether its interest or principal, this money has already been taxed and you have a full dollar to spend.  So an important general senior tax recommendation is to use up your after-tax dollars before using your pre-tax dollars.

Long Term Care Insurance
Last, consider that the federal government will subsidize your cost for long term care insurance.  Since the average buyer of long term care is age 62 and the government allows a larger deduction based on higher age, this is specifically a senior tax issue.  Although not many people qualify, to the extent your out of pocket medical expenses and health insurance premiums exceed 7.5% of your adjusted gross income, you can deduct that excess as an itemized deduction on your tax return.  If you pay a long term care premium, that can be added to your out of pocket health expenses thereby making it potentially deductible.  You can read more details on utilizing these senior tax benefits in the booklet below.  Click on the booklet and get your free copy.

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Your Immediate Annuity May Give You a Double Tax Break

If you’re concerned about having enough income to last and you want to maximize it while reducing taxes – perhaps an immediate annuity is for you. You’d ensure an income for life but it’d depend on your age and sex. When you die, that’s it – your investment is gone. But this may be fine in your case if you desire to maximize your cash flow.

How does the immediate annuity help reduce tax?
Each payment from an immediate has both a taxed and untaxed portion.  This is due to an IRS rule that may make no logical sense but it helps seniors interested in reducing taxes. The untaxed part is your basis –i.e. your purchase price. Its fraction of each payout - called the exclusion ratio - remains fixed at the ratio of your purchase price to the expected total payout based on your remaining life expectancy.  This part of the annuity payment is not taxed over term of the annuity.

To illustrate the power of reducing taxes, we’ll estimate the total payout for 15 years for a 65 year old male living in California who invests $100,000 - based on a leading supplier of immediate annuity quotations. Fifteen years is the IRS’s expected life at of a 65 year old man. Their estimate gives $675/month – with no beneficiary (lower payouts would include guaranteed term payouts to beneficiaries). The total payout over 15 years at $675/month is $121,500. So the exclusion ratio is 82.3% (= $100,000/$121,500)!  Therefore, of each payment received 82% is not subject to tax for the next 15 years and this makes immediate annuities a powerful choice for reducing taxes.

So, your annual income from your $100,000 immediate annuity investment is $8,100 of which only $1,434 is taxable. At a 25% marginal tax rate , you net about $7,700 per year.

If you had invested your $100,000 in 10 to 30 year corporate bonds at the prevailing 5% rate , you’d generate a $5,000 yearly income but all of it taxable. Again at a 25% marginal tax rate, your net income is $3,750 – about half as much as you net from your annuity.  So a large part of your increased cash flow comes from reducing taxes using the exclusion ratio that IRS provides for an immediate annuity.

Purchasing tax free bonds – at a lower prevailing interest rate- may give you more net income, but still significantly less than from an immediate annuity.  Additionally, taxfree bonds will not provide the tax reducton feature described below.

Further possible tax reductions on taxable social security
Social security becomes subject to tax for provisional incomes beyond $25,000 for single individuals, and $32,000 for married filing jointly. It can be taxed up to 85% beyond the $34,000 and $44,000 thresholds respectively. This provisional income includes all taxable income, 50% of your social security income, and tax free bond income. Reducing taxes on social secuity income is an obvious desire of most seniors.

Your immediate annuity income adds only $1,434 to your provisional income compared to $5,000 from 5% tax free bonds or corporate bonds. If you’re near or within the above threshold levels, you’ll reap additional tax savings from social security income that remains untaxed due to your annuity’s lower contribution to provisional income. Reducing taxes in this manner could be an additional $1,000 annually to spend.

Note that if select lifetime payments for your immediate annuity and live beyond your life expectancy, reducing taxes with your immediate annuity no longer works as all payments become taxable.  However, most immediate annuity owners are happy to live beyond their life expectancy to give up tax reduction.

You can learn  more about retirement annuities and tax planning for retirees at our main web site.

Get your copy “Six Ways that Retirees Can Reduce Taxes”

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Financial advisors charge in two basic ways—they earn transaction commissions on the products you buy or you pay them directly for their time or project.  Many people prefer fee only financial advisors because they believe the advisor has greater objectivity as he is not getting compensated for selling a particular product.  While fee only financial advisors are common when it comes to investing, they are scarce in the insurance industry but each year, more commission-free insurance products hit the market and more fee only financial advisors use them.

The fees you pay may be based on different services. For example, you may pay hourly fees like you would with an attorney, retirement planning fees (a project fee for a retirement plan, and asset management fees (e.g. 1% of the portfolio value being managed by the fee only financial advisor). Neither advisors nor affiliates may receive commissions, rebates, awards, finder’s fees, bonuses or other forms of compensation from others as a result of a client’s implementation of the individual’s planning recommendations. The fee-only model of compensation supposedly reduces the potential for conflicts of interest between the advisor and the client in that the advisor is not beholden to insurance companies, particular investments, and other financial companies.

Since the advisor does not gain from any transaction, the fee only financial advisor has no incentive to tell you to buy when the market is weak, have you move money from a money market fund if that is the most suitable depository at a given time or push one investment or insurance product over the other.  The fee only financial advisor working on an investment management fee does have an incentive to tell you to “hold” during bear markets.  If you pull your money out of the portfolio, he stops earning his 1% asset management fee.

Not all investors have access to a fee only financial advisor as they tend to work with wealthier clients.  Operating on a fee-paying basis may make the advice too expensive to obtain for the broader market otherwise catered for by commission-based advisers. If a client must pay a flat fee of $1000 to his adviser as a lump sum, this is less manageable for all but the wealthy, rather than the more manageable option of paying through regular charging and commissions.  However, it is quite conceivable that an investor pays far more in commissions than they would dealing with a fee only financial advisor because the investors typically is unaware of the commission paid as they are often buried in the product (most notably, insurance products).

In fact, among some investors, there is a common misconception is that financial advisors provide their services for free. Many investors don’t understand the hidden costs they pay when an advisor recommends a packaged product (mutual fund, annuity, direct investment). Consider this: making a $50,000 investment in a fund with 5% load would translate into the equivalent of more than 14 hours of portfolio planning at $175 per hour! If you were to hire an advisor for 14 hours at that rate, you could expect him or her to accomplish a great deal of work that would produce a more balanced portfolio, returning a potentially higher rate than the loaded mutual fund. The fee-only type of compensation provides investors with the opportunity to get more service out of the money they spend on professional advice and stock-picking expertise.

Note that major brokerage firms offer fee only financial advisor.  However, this advice may not be quite as independent as dealing with an advisor who has their own Registered Investment Advisory firm and is not affiliated with any firm.  This independence allows the greatest degree of objectivity.

It is currently difficult to find a fee only insurance advisor who can help you select annuities or long term care insurance.  For these products, most professionals charge commissions on the product sale or you “do it yourself” with the assistance of a long term care calculator and annuity calculator.

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We’ve all heard the saying, “there’s no such thing as a free lunch,” but in fact, there is.  Many financial planners will invite you to a free lunch to hear their presentation in hopes that you want to meet with them individually.  They will in fact offer a free retirement planning session.  How can they make money doing this?  In hope that you become a client from which they will earn commission from product sales or fees for additional financial planning or money management.  So one strategy for free retirement planning is to attend as many lunch seminars as possible and then accept the financial planner’s invitation for a free retirement planning hour.  If you do this enough, you may actually get some worthwhile advice and you will also have many view points to compare!

While the above is recommended tongue in cheek, there are some legitimate and structured sources of free retirement planning. 

1. More and more web sites are interactive and if your financial situation is simple, may provide sufficient free retirement planning direction.  Do a Google search on “interactive financial planning.”
2. The Financial Planning Association often sponsors free retirement planning sessions at their various meetings across the country.  Contact the association through their web site www.fpanet.org
3. Check with your employer–more and more companies provide a free retirement planning benefit to their employees.  Of course, the employer pays the financial planning firm a retainer and then offers the benefit to employees at no cost
4. Check with associations you belong to.  For example, AARP runs a free tax return preparation service during tax season.  Other organizations may offer a similar free retirement planning service.
5. The National Association of Financial Planners, similar to the FPA, offers free retirement planning sessions through the year.  Check the website at http://www.napfa.org/.
6. The National Endowment for Financial Education has many resources on their web site.  Additionally, you can email them and ask if they fund any free retirement planning resources in your area.  http://www.nefe.org/
7. The CFP(r) Board also provides free retirement planning clinics at different times. Here’s an example http://www.cfp.net/clinic/overview.asp

You may find many more resources.  Do we web search  on “free retirement planning” and “free financial planning” and you may want to add to the search phrase the name of your town or state to locate an event near you.

The website which accompanies this blog offers retirement income plan advice and a suite of tools for retirement income planning like the immediate annuity calculators.

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You’ve decided to retire now. You know how much you’re due from social security and any pension too. Then there’s the lump sum from your defined contribution plan at work. What retirement planning tips can help you make the most of your lump sum?

In most cases, you want to do a direct rollover of the lump sum into a new IRA.  This’ll prevent paying any tax, keeps your earnings growing tax-deferred, and preserves protection of the funds from creditor claims (rollover funds kept segregated get better creditor protection than your contributory IRA–this is a little known retirement planning tip).

Another retirement planning tip on investing your rollover–don’t commit these rolled over funds to any particular investment until you determent how much of it you’ll need each year. Put it in a money market account until you decide. When considering specific investment options look closely at the fund fees; they can eat away at your compound return benefits.  You won’t get the straight story from anyone on mutual fund fees so please read John Bogle’s book–Bogle on Mutual Funds.

Here’s a retirement planning tip if you know you want top spend some of the money right away–you may be able to get at it tax free.  Before you roll over your lum sum to an IRA, ask your comopany plan administrator is any of the funds were contributed post-tax.  If so, this means you have already paid tax on some money which can be removed–BEFORE–you do a rollover. 

Here’s another retirement planning tip–if any of our plan is invested in shares of your company, you may be able to save income tax by using the special Net Unrealized Appreciation Rules.  Ask your retirement advisor or tax counsel.  This special rule allows you to convert ordinary income (taxed at up to 35%) to capital gains income (currently 15%).

Another retirement planning tip about your investment allocation–at age 65, your life expectancy is 18 years so 40% of your lump sum needs to go into growth-type investments to beat out inflation. You’ll diversify your holding to include growth as well as income-producing investments. And be sure you maintain some of it in the money market account for emergencies.

Retirement planning tip about withdrawals form your lump sum–if you want its income but don’t want to deplete your money, you should consider annual withdrawals of just 3% to 4% per year. Of course, you must make the IRS’s minimum required distributions after turning 70½. If you do have funds outside a tax-deferred plan, it’s more tax beneficial to use those up first so that your tax-deferred funds can keep growing at the higher compound rate that tax-deferring allows.

If you’re worried about assuring yourself –and your spouse – a lifetime income beyond what social security (and any pension) is giving you, you might consider using all or a portion of your IRA to purchase an immediate annuity. This can ensure a lifetime income that- is either fixed or variable according to your choice–a good retirement planning tip for those who need more cash flow. Check monthly payments with the immediate annuity calculator.

Our final retirement planning tip–since there’s a good chance that you may need long term care in the future, you may want to purchase a long term care insurance policy now. It can be expensive – so purchase it as early as possible. Direct costs of long term care can devastate your savings.

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Many retirees lack control over 50% or more of their retirement income.  For example, if a retiree has income of $50,000 annually, and $30,000 comes from social security and employer pension, the retiree controls less than half of his retirement income making those sources somewhat useless to discuss.  So let’s focus on the sources of retirement income you can control and how to boost them.

Interest Income
An important source of retirement income is Interest income.  Interest income comes from money you loan.  You may loan it to a bank (in the form of savings accounts or term deposits), you can loan it to a company in the form of owning a bond, you can loan it to a local government in the form of owning a municipal bond and you can loan it to a national government, US or otherwise.  In all cases, these sources of retirement income you control because you select the instruments to own.  Generally, the longer term instruments will pay you higher interest income.  For example, if you want to loan your money to the bank for 12 months, don’t be upset to earn only 4%.  If however you loan you money to IBM for ten years, you may earn 6%–a whopping 50% more in your retirement income.

Of course you may come up with all types of reasons  not to lend to IBM–its not as safe as the bank, ten years is too long, etc. but all of these excuses add up to a much smaller paycheck for you.

Dividend Income
Dividend income from stocks and mutual funds can be an important and significant source of retirement income. If you own mutual funds, there are funds oriented toward paying a consistent dividend income and those that do not.  Are you in the right funds?  Similarly, there are value stocks that pay dividends in the 5% neighborhood while many growth stocks pay no dividends at all.  By your selection of stocks and funds, you control this important source of retirement income.

Annuitization
Although many retirees don’t often think of their retirement income in the following way, they should.  Your assets are always a source of retirement income and how much of your assets you “annuitize,” i.e. convert to an income stream, is a personal decision that can be the difference between eating filet mignon or dog food.  The simplest way to create this source of retirement income is to buy a life annuity from an insurance company.  For example, a 70 year old male purchasing a life annuity for $10,000 can expect payments of $8,500 annually for life.  Of course, when he dies, the $100,000 is gone.  BY purchasing the life annuity, he has converted capital to a source of lifetime income. The immediate annuity calculators will give you an idea of how much retirement income you can obtain in this manner.

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Seniors who are in a cash flow bind because of increasing expenses or a drop in their investment income may want to look into tapping one of their most valuable assets: their homestead.

There are several ways to do this.  Homeowners could sell the home, but they would have to move.  Or they could take out a loan against it, which would leave them with payments to make each month.  The third choice is a reverse mortgage.   

A reverse mortgage is a non-recourse loan that lets homeowners over 62 years old convert the equity in their house into cash.  Yet it allows them to still live there, and retain title and ownership.  The lender will give the payout all at once, as a fixed monthly income (up to lifetime), as a line of credit, or as a combination of these.

The money will have to be paid back with interest when your clients die, sell the home, or permanently move out.  But they or their heirs have the option to pay off the reverse mortgage at anytime and keep the house.  And the amount that must be repaid can never exceed the value of the home.  Furthermore, if the sales price exceeds the amount owed, the excess will go to the homeowner or their estate.

There is no income or medical requirement to qualify for a reverse mortgage.  And borrowers can use the money any way they wish, for example, to pay daily living costs, medical bills, or travel expenses. 

The size of the reverse mortgage depends on several factors, including the youngest homeowner’s age, the home’s value, and current interest rates.  The money they receive will be tax-free and will not affect Social Security or Medicare benefits.  However, it could influence Medicaid qualification. 

Take for example, Bill and Marge, ages 65 and 63 respectively.  They own their home, which is valued at $250,000.  Bill had to close his part-time consulting business because of health problems, and the loss of this income forced them to cancel a once-in-a-lifetime cruise that they had been planning for the past year.  A reverse mortgage offered Bill and Marge the following options:¹          

            Single lump sum or line of credit - $140,285

            Lifetime monthly income - $784

 They chose the line of credit and took out enough to pay for their cruise and single-pay LTC insurance policies. They’ll keep the balance of the available cash for another vacation, for an emergency, or to supplement their income in the future.

More information and a list of reverse mortgage lenders in your state are available from the National Reverse Mortgage Lenders Association.  This source of retirement income promises to become more common as baby boomers with inadequate retirement savings tap whatever home equity they have.

 
¹ http://www.rmaarp.com/estimates.htm

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Selecting the right retirement financial planner is important to you.
Here are questions to ask a retirement financial planner candidate that will help distinguish one from the other.

1. What experience do you have with retirement financial planning?
Find out the percentage of his clients by age category.  You want to make sure that the bulk of his clients are similar to you so that he has experience in actual planning for people like you.

2. What are your credentials and what do they mean?

There are retirement financial planners with great credentials that are not that competent and vice versa.  But credentials do illustrate an individual’s willingness to engage in further learning and take on additional work.  Find out what work was required to earn each credential as there are some credentials in the financial services industry that have little value.

3. What services do you offer?
Likely, you need assistance with retirement income planning, tax reduction, budgeting, possibly estate planning and portfolio management.  If his list of services does not match your needs, then move on to another retirement financial planner candidate.

4. What is your approach to retirement financial planning?
When you ask this question, you look for a thoughtful systematic approach.  It might sound like this:

1. First, we estimate the income you will need in retirement based on your desires.
2. Next, we calculate the sufficiency of your current financial resources to achieve that income.
3. If the resources are insufficient, then I present you with alternatives to fix the deficiency as best we can.
4. Next, we document a spending plan, a retirement plan that takes into account which pots of money get used first, tax minimization and a portfolio design.
5. Then we implement what you agree on.
6. Last, we meet every 6 months to review progress and account for any changes in your desires or circumstances.

If the retirement financial planner cannot easily state their approach in a concise and chronological manner, find a professional that will.

5. How can I tell that you’re competent?
Don’t be afraid to ask this challenging and direct question to a prospective retirement financial planner.  If he cannot give you an answer that inspires confidence, then why trust him with your financial future?

6. How will I pay for your retirement financial planning services?
As part of your financial planning agreement, the financial planner should clearly tell you in writing how she will be paid for the services to be provided.

Retirement Financial Planners can be paid as follows:

• Fees based on an hourly rate, a flat rate, or on a percentage of your assets
• Commissions paid by a third party from the products sold to you to carry out the financial planning recommendations.
• Commissions are usually a percentage of the amount you invest in a product.
• A combination of fees and commissions whereby fees are charged for the amount of work done to develop financial planning recommendations and commissions are received from any products sold.

In addition, some planners may offset some portion of the fees you pay if they receive commissions for carrying out their recommendations. You would prefer to deal with a professional that works on a fee basis rather than commissions that may be “buried” or hidden in products.

7. I have assets of  $xxxxxx.  How much do you typically charge someone like myself and what are the components of those charges?
This question gives clarity to the answer from question 6.

8. Will my retirement financial plan look like those for your other clients?
If the planner tells you everything is totally customized, be ready to pay a fortune or the planner is not being honest.  If most of the retirement financial planner’s clients are between age 55 and 65, then the plans SHOULD look similar from one another as people in the same circumstances have similar retirement planning issues.  It’s the similarity among the retirement financial planner’s clients that gives him the experience you desire.
9. Have you ever been publicly disciplined for any unlawful or unethical actions in your professional career?
While you may think this is an important question, there is no reason to ask it as you can get this information on the Internet.  The planner is either responsible to the SEC, FINRA and/or the State Department of Insurance.  All 3 list disciplinary records and in 15 minutes, you can check the background of any potential retirement financial planner.

10. What do I get in writing?
If the retirement financial planner offers little in witing, walk.  At minimim, you should get a list oif fees and services, disclosure of any conflicts of interest, a written plan and an investmemnt policy statement.  While these dont need to be lengthy, a reputable retirement financial planner will provide documents that serve these purposes.

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Annuities are term deposits with insurance companies.  They are similar to certificates of deposits at the bank (note: bank deposits are FDIC insured while annuities are guaranteed by the issuing insurance company).  There are two types of annuities: fixed annuities and variable annuities. Fixed annuities have these features:

  Your principal is guaranteed, it will never decline
  The insurance company adds interest to your deposit each year
 The annuity is for a specific term that you select—generally, the longer the term, the higher the interest
  All interest is tax deferred (you do not report it on your tax return) until withdrawn
  You may withdraw 10% of your balance annually
 If you withdraw more than 10% during the term, you will pay withdrawal penalties (called surrender charges)

Most fixed annuities offer an initial one-year rate with the rate changing each year.  A few companies offer a locked-in rate for the entire period.  We recommend that investors always get a locked-in rate.  Fixed annuities are the safest, most conservative choice.  In this short description of how fixed annuities work, we have not covered the many permutations–each annuity company’s contract is different so read it thoroughly. The annuity calculator will give you an idea of the amount you can accumulate.

Next, let’s consider how variable annuities work. With variable annuities, rather than receiving interest from the annuity company, your money is invested into stock or bond accounts (these are investment accounts like mutual funds).  You may earn more or you could lose principal, depending on the accounts you select and if the stock and bond markets rise or fall.  Variable annuities are the riskiest choice.

Maybe the best choice is an index annuity as it is a “hybrid” of a fixed annuity and variable annuity. With an index annuity, your principal is guaranteed like the fixed annuity, but your interest each year is based on increases in the S&P 500 index (this is an index based on 500 large stocks, such as IBM, General Motors, Intel, etc).  So, your interest you earn is tied to performance in the stock market but you can never lose principal (unless you withdraw your principal prior to the end of the term and pay surrender charges).  You get the guarantee of a fixed annuity with the potential profit of a variable annuity.

Everything discussed about how annuities work up until this point describes the growth phase (called the accumulation phase) of the annuity.  When and how do you get your money out? Here’s how annuities work regarding the accumulation phase and you generally have three options:

  You can leave the annuity alone and continue to let it grow
 You can exchange the annuity to another company that may pay you a higher rate
  You can start to make withdrawals

 The withdrawal phase is called the distribution phase.  You have three options:

  You may withdraw all of your money at once
  You can withdraw some money each year based on your desires
  You can annuitize the policy

Annuitizing means that you accept fixed monthly payments from the annuity company.  The payments can span your lifetime or be limited to a specified period (e.g. 10 years).  At the end of the period you select, the annuity is completely paid out.  If you select a lifetime payout, the payments will continue for as long as you live.

As you might imagine, the monthly payments are usually more for a fixed 10-year payout than if you select a lifetime payout (the option which pays the most depends on your age).

Annuitizing may or may not be a good deal and depends on your circumstances.  

If you are single and need to maximize your monthly income, the lifetime payments may be a very good deal.  On the other hand, if you want to leave money to your heirs, annuitizing would not be good because there will be nothing left at the end of the annuitization period.  

What is an immediate annuity?

An immediate annuity has no accumulation phase.  You make a deposit with the insurance company and immediately begin receiving payments.  These annuities are generally suited for senior investors (age 70 plus) who desire to increase their monthly income.  You can see how much you get using the immediate annuity calculator.

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