Robert McRae, AAMS®
Edward Jones Financial Advisor
Like everyone, you want to retire comfortably – without worrying about running out of money. And that’s why you should consider every available source of income for your retirement years. One such source might be a fixed annuity – but is it right for you?
A fixed annuity is an insurance product that can provide you with an income stream you can’t outlive, although payments also can be structured to end after a certain number of years. Your principal and interest rate are guaranteed, based on the claims-paying ability of the issuing company, and the interest you earn is tax-deferred and will compound annually until you begin taking income.
These features are certainly attractive, but, even so, before you invest in an annuity, you will need to ask yourself some key questions, including these:
• What other sources of guaranteed income will I have available? One way to evaluate the value of an annuity is to determine what other guaranteed income you might have available during retirement. If you find that Social Security and any other sources of assured income, such as a pension, are enough to cover all or most of your essential living expenses, then you may not need any additional guaranteed income from an annuity. However, if these other guaranteed income streams aren’t enough to meet your cost of living, then you might want to invest some of your assets in an annuity.
• How much of my retirement funds should I consider putting into an annuity? You’ll need to determine the portion of your diversified portfolio that a fixed annuity should occupy, taking into account the nature of this investment – specifically, it’s a fixed-rate, income-producing vehicle. This means you’ll want a certain percentage of your portfolio in stocks, another in bonds, and still another percentage in the guaranteed income from an annuity. The exact percentages will depend on your age, proximity to retirement, risk tolerance and other factors.
• What are the issues I might want to discuss with a financial professional before investing in an annuity? As mentioned above, you will need to determine if, and how, an annuity meets your needs and how it fits into your portfolio. A financial professional can evaluate your situation and help you answer these questions, as well as inform you about other issues related to an annuity. For example, if you decide to tap in to your annuity earlier than planned, you probably will incur surrender charges. These charges decline each year, usually reaching zero after seven years. Furthermore, different annuities come with different fees, so a financial professional can help determine what options would best suit your needs.
You’ll also need to be aware that while the interest you earn is tax-deferred, it isn’t tax-free. You will be taxed at your ordinary income tax rate once you start taking withdrawals, and withdrawals prior to age 59½ may be subject to a 10% federal tax penalty. So, you’ll want to consult with your tax advisor before withdrawing from your annuity.
A fixed annuity could be a valuable asset during your retirement years. But, at the same time, it’s a big investment – so get the help you need to determine if you’re making the right choice.
Edward Jones is a licensed insurance producer in all states and Washington, D.C., through Edward D. Jones & Co., L.P., and in California, New Mexico and Massachusetts through Edward Jones Insurance Agency of California, L.L.C.; Edward Jones Insurance Agency of New Mexico, L.L.C.; and Edward Jones Insurance Agency of Massachusetts, L.L.C.
This article was written by Edward Jones for use by your local Edward Jones Financial Advisor