Annuities provide versatile strategies for achieving financial security, with three key approaches: maximizing retirement income, minimizing taxes and diversifying portfolios. Each strategy serves a specific purpose, whether you’re looking to ensure a steady income in retirement, reduce your tax liabilities, or broaden your investment options.
Key Facts About Annuities For Guaranteed Income
- Investors can use annuities to diversify their retirement portfolio by establishing multiple income streams or an income floor.
- Annuities minimize taxation by growing tax-deferred and can help retirees delay taking required minimum distributions.
- Strategies like laddering and delaying Social Security benefits can allow annuity owners to maximize their income benefits.
Maximizing Retirement Income
Annuities can play a pivotal role in creating blended income in retirement. This retirement strategy involves combining different sources of income to achieve better financial outcomes in retirement. A recent Goldman Sachs study found that nearly 60% of retirees using the blended income strategy experienced a better retirement lifestyle.
Most people who reach out to me about annuities want it for income. As people approach retirement, they often seek more assurance on their income rather than the risks from the stock market that they are used to. Annuities are providing a lot of guaranteed income right now because of the high interest rate environment.
John Stevenson, CFFOwner and Advisor at Stevenson Retirement SolutionsJohn Stevenson, a Certified Financial Fiduciary®️, specializes in securing retirements with tax-free accounts. With a focus on guaranteed retirement, he’s ensured none of his clients suffer from market fluctuations. As a renowned educator and podcast host, John empowers thousands weekly, sharing his expertise in minimizing taxes and protecting against financial downturns.
Most Americans receive Social Security benefits when they retire, but these benefits often aren’t enough to cover all of their fixed expenses. By purchasing a fixed or fixed index annuity, people nearing retirement can grow their savings tax-deferred and then convert those savings to another source of income.
Delaying Social Security With Annuities
Purchasing an income annuity can help you delay claiming Social Security benefits, boosting your overall retirement income. Americans born after 1960 aren’t eligible for full retirement benefits until they turn 67, but many people don’t want to wait until they reach full retirement age to retire.
By purchasing an income annuity that pays a guaranteed amount each month for a set number of years, you can retire and still receive income every month until you’re ready to claim Social Security benefits. This strategy could result in receiving up to 30% more income from your Social Security benefits.
Laddering Annuities
Annuity laddering strategies involve purchasing multiple annuities to make the most of changing market conditions.
The goal of annuity laddering is to maximize your return by dividing your principal among a variety of annuities at different times. This allows you to take advantage of changing interest rates without missing opportunities under the current market conditions.
For example, if you have $400,000 to spend on annuities, you can buy an annuity for $100,000 in each of four consecutive years, or you can buy several annuities with different surrender periods. As each surrender period ends, you evaluate whether to keep your money in the same annuity or withdraw it and buy a new one with better, more current features.
You can also buy multiple deferred annuities that start paying out at different times, allowing more growth for the contracts with longer accumulation phases.
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Minimizing Taxes
Annuities grow tax-deferred, meaning you won’t be taxed on the growth your annuity earns until you withdraw those earnings from the contract. This allows you to retain more of your annuity’s value, which can then compound further before you start taking income.
Hedging Against Income Tax With Annuities
Retirees can use annuities to provide stability as their tax rates change throughout retirement. This can be especially useful for married couples. If one spouse outlives the other, the surviving spouse must then file as a single taxpayer. The change in filing status can cause their tax rate to increase substantially during a time when the surviving spouse also has less income to depend on.
A joint and survivor annuity will continue paying the same amount of income even after one spouse dies, and this income won’t be taxed as heavily because only a portion of each annuity payment is considered taxable income. In this way, an annuity could provide a stable income stream for married couples in retirement.
Navigating RMD Requirements With an Annuity
If you have a traditional IRA or 401(k), the IRS requires you to make withdrawals of certain minimum amounts when you turn 73 and every year after that. Those withdrawals are called required minimum distributions (RMDs).
RMDs can have tax and savings implications that some retirees want to avoid, especially if they don’t need to spend the money when withdrawals are required. You can use annuities to mitigate those concerns.
For example, you can use the money you’re required to withdraw to purchase a flexible premium fixed annuity. With a flexible premium annuity, every premium payment adds to the annuity’s value, and the annuity will continue to grow tax-deferred.
This is not a way to avoid the immediate tax implications of the RMD, but it will help you make the money last longer.
Incorporating Qualified Longevity Annuity Contracts (QLACs)
A qualified longevity annuity contract (QLAC) is a deferred annuity purchased inside a qualified retirement account. Under the law, a QLAC can account for up to $200,000 of the retirement account’s total balance.
The value of the annuity is exempt from required minimum distributions, which means an annuity strategy that includes a QLAC can reduce your RMDs by as much as 25%.
You are not required to take distributions from a QLAC until the age of 85. This allows the money to accumulate over a longer period of time, which leads to greater income-benefit payments from the annuity.
Overwhelmed by Safe Retirement Options?
Portfolio Diversification
Because they offer guarantees, annuities can provide diversification as a hedge against the volatility of the stock market. Including an annuity as part of your overall retirement plan gives you some security as you allow your other investments to grow.
Combining Fixed and Variable Annuities
One strategy for diversifying your portfolio with annuities involves combining fixed and variable annuities. Instead of putting some of your savings into one annuity, you could split that premium amount and put part of it into a fixed annuity and the other part in a variable annuity.
In this scenario, the portion of the portfolio allocated to fixed annuities contributes reliable growth, principal protection and the option for guaranteed income payments. The variable annuity offers greater return potential due to its market participation, which helps offset the risk of inflation eroding your retirement savings.
Utilizing both fixed and variable annuities allows investors to capitalize on the advantages of both products while hedging against their disadvantages. You can have the guaranteed returns of fixed annuities with a growth potential that exceeds the limitations of those products.
Conversely, you can take advantage of the market participation that variable annuities offer without exposing yourself completely to downside risk.
Establishing an Income Floor With a SPIA
A guaranteed lifetime payment from a single premium immediate annuity (SPIA) can help you secure a certain level of minimum income, or floor, that you can rely on.
One strategy to consider is securing an income floor sufficient to cover all of your necessities such as housing, food and utility costs. When you have a secure floor, you can feel better about your other investments and may be better situated to weather volatility.
For example, suppose your necessary spending is $2,000 per month and your Social Security benefits cover $1,500 of that. An annuity that pays you $500 per month would be enough to know that you’ll be able to afford your living expenses every month regardless of what happens with your investments.
