At this point, 2022 has been a year to remember right along with -- tongue in cheek -- some of my other favorite years like 2008, when the S&P 500 was down 30+% or 2002, when we saw a 22% decline.
The significant market volatility we have seen this year -- the S&P 500 stumbled to its worst performance for the first half of a year since 1970 -- has a lot of folks looking for alternatives. The I-Bond, with its inflation-tied return, has garnered a lot of attention, but guaranteed fixed savings or income annuities have also become more attractive to many folks. They may be plain vanilla, but they can be a reliable workhorse within a portfolio. Here's a quick look at how they work and when they might be a useful addition to your retirement toolkit.
Savings annuities are tax-deferred and ideal for someone who wants a part of their portfolio to go in only one direction -- up. With competitive interest rates and zero market risk, a savings annuity can be a great way to add a guaranteed component to your retirement portfolio. Taxes aren't due on your interest until you withdraw the money, which allows for powerful compounding. The IRS allows taxes to be deferred; therefore an annuity is considered a retirement vehicle. As such, withdrawals prior to age 59½ could be subject to taxes and penalties. Often, people mistakenly believe that if they put money in a savings annuity, they will be required to take the money out through periodic distributions over their life. While this is an option, it's not mandatory. On the other hand ...
Income annuities allow you to turn a lump sum into a stream of income over a number of years, your life, joint lives or a combination thereof. Some folks may worry about losing their principal if they were to die early, but there's an option for that as well. For example, you could elect a payout to you and your spouse for as long as either of you are alive, with a return of premium option to ensure that you, your spouse or your named beneficiary will get back at least what you paid for the annuity. In essence, they're a tool to build your own pension. If you're concerned about going through your retirement savings too quickly, an income annuity can provide a "retirement paycheck" you won't outlive. Ideally, a retiree's core expenses are covered by a combination of guaranteed income sources. When Social Security, military retirement and corporate pensions aren't enough, an income annuity might be a reasonable option to fill the gap.
An annuity is meant to last a long time, making your life insurance company's financial strength of utmost importance. If you're looking for an alternative to all the "excitement" the markets are providing today, it might make sense to explore annuities.
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