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From setting aside a portion of your earnings each year to investing for a long-term horizon, saving for retirement is a fairly straightforward concept. Once you reach your retirement date and begin drawing income from your savings, however, things can feel more complex and, at times, uncertain. 

Annuities can provide longevity insurance by protecting against the possibility that you could outlive your savings. Options include life annuities, providing an income stream throughout your retirement chapter and joint annuities, providing both you and your spouse payments for the remainder of your lives.1 The first step is to determine whether an annuity is right for your lifestyle and circumstances. 

Address Your Retirement Portfolio Needs

Implementing an annuity into your retirement portfolio can aid in reducing your likelihood of running out of money. While the benefits improve with longevity, value exists throughout the addition of an annuity. 

While your retirement strategy should not depend solely on an annuity, having one in place can provide investors with an opportunity to take more risk with other aspects of their portfolio – because they have guaranteed income already in place. The decision whether or not to add more risk to a balanced portfolio should be considered at great length with your investment advisor.

Weigh the Pros and Cons

With a variety of annuity options available, it’s important to consider the advantages and disadvantages of each. Generally speaking, the more straightforward the annuity, the less costly it is. It’s difficult, however, to establish a definitive pros and cons list across the board. Why? Because it depends largely on the individual purchasing the annuity and the circumstances of their financial picture. 

Depending on what type of annuity you purchase, you could run the risk of passing away before receiving your money back. On the other hand, a term-certain annuity runs the risk that you outlive your annuity’s term of agreement – meaning payments stop and you’re less an income source.2  

Before selecting an annuity, it’s important to be aware of the potential tax implications this fixed income may have on your retirement. When filing your taxes, you will be required to report the payments received from an annuity as income. The amount of tax you may be required to pay on this income will vary. Taxation will be dependent on the product as well as whether or not the annuity was bought using registered savings or non-registered savings.2

Choose the Best Annuity for You

At the end of the day, the decision to purchase an annuity is incredibly personal, as every individual’s financial situation is unique. It’s important to clarify your needs and goals in addition to evaluating your comfort level with risk as you decide if an annuity is right for you.

Establishing how close you are to retiring and understanding the lifestyle changes that come with retirement and the loss of steady income are a few important factors to keep in mind for anyone preparing for this next chapter. Even further, clarifying if you want a reliable income for life with little risk and low costs will help you determine if a life annuity is the best option for you. Alternatively, a variable annuity might be suitable if you’re comfortable with risk in exchange for the possibility of higher returns.3 

There’s no doubt that annuities can be complicated, which is why it’s important to discuss your needs with a professional. This will help you evaluate your retirement portfolio and further understand your financial options. 

Take your time in understanding the details of your annuity contract, including associated fees and commissions, and don’t be afraid to ask for more than one quote to compare your options. Take into consideration the reputation of the company you’ll be working with, ensuring that they comply with annuity regulations and are financially sound. 

This content is developed from sources believed to be providing accurate information, and provided by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.

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