|As if saving for decades for your retirement isn't work enough, planning just how you will spend your retirement nest egg once you've put your full-time work years behind you is a separate -- but no less important -- task all of its own. By now, many of us know that without careful planning, even the best-laid plans can leave you cash-poor in a few years, forcing you to scale back your standard of living sharply at a time when you should be enjoying the rewards of a lifetime of work and thrift. Worse, you might find yourself re-entering the full-time workforce just to make ends meet. |
But assuming you've done (or are doing) the right thing in terms of putting money aside, deciding just how you want it back is crucial. Is a steady stream of income more important to you than leaving a sizable estate for your heirs? If you have been managing your own investments as a worker, would you be comfortable with an insurance company's annuity limiting your investment choices once you were a retiree? And how heavily will your hard-earned investment gains be taxed once they emerge from under the tax-deferred shelter of an Individual Retirement Account (IRA) plan? These are just a few of the questions you will want to answer when trying to determine how to have your retirement money distributed to you after your full-time working days are done.
One of the more common ways for people to receive their retirement money is through annuity payouts. Annuities offer one thing that most recent retirees want more than anything else: peace of mind. An annuity guarantees a monthly income for life in exchange for an investment in a set of securities offered through the annuity program. In fact, not only do annuities ensure an income stream for your lifetime, but some annuities also offer significant benefits for your heirs, as well.
Insurance companies, brokerage firms, and banks all sell annuities -- which underscores both the advantages and disadvantages of annuity products. Capital gains and dividends from variable annuity investments are tax-deferred, providing some shelter for those, such as recent retirees, who are no longer eligible for traditional IRAs. In addition, the fact that annuities are available from a variety of sources means that annuity purchasers can afford to shop around for the annuity offering the best choices in mutual funds.
There are some downsides to annuities. It is important to note that once an annuity contract has been purchased, there is no going back. Your capital is now the engine that drives your annuity payments. This underscores the importance of learning just what investments your annuity will make (what funds, stocks, bonds, and so on). Unfortunately, as far as annuities invested in mutual funds are concerned, many of the mutual funds available to your annuity are not as good as mutual funds you might be able to select on your own. Often, the mutual funds available are those with some connection to the company or institution that is selling the annuity -- which can mean higher fees and lower returns (either because of the high fees or simply due to underperformance).
The issue of fees and annuities is especially important for recent retirees, who may prefer to have their annuities invested in conservative instruments such as money market funds. It is not uncommon for someone to actually pay more in fees than they receive in annuity income, through the cruel combination of high fees and low returns.
Annuities are by no means the only method of receiving your investment money after retirement. Many recent retirees prefer a single lump-sum distribution to annuities for many of the reasons mentioned above. Receiving a lump sum means that the whole of your investment capital becomes available to you and can be considered a part of your estate after death (unlike annuities, in which your investment capital is "exchanged" for the monthly annuity payments you receive). Estate preservation is one of the reasons why many prefer a lump-sum distribution upon retirement.
Just as careful planning during your work years is key to a financially secure retirement, deciding which tool you will use to crack open your nest egg when you retire will go a long way toward making your retirement years free of money anxieties. And if you did play a moderately active role in your finances leading up to retirement -- even if all that meant was choosing the best mutual fund available in your company's 401(k) plan -- you will already have many of the skills needed to begin comparing annuities and discussing with a tax professional how best to meet your final set of financial goals. Whether you simply want to make sure you will have enough money to maintain your standard of living in retirement or you contemplate a sizable investment-based estate that you would like to leave behind, it is never too soon to begin educating yourself on what to do with your retirement money.
David Penn can be reached at DPenn@Traders.com.
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