Is it time to annuitize?

It just might be. Here’s why baby boomers are choosing immediate annuities.

Nobody wants to outlive their money. In fact, somebody recently asked me, “How do I organize my money so that I spend my last dollar on my last day of life?”

Since neither of us knew when that day would occur, we selected an immediate annuity as the solution.

An immediate annuity is a good component of any retirement plan. Immediate annuities are issued by insurance companies, and they are one of the few retirement income sources that guarantee an income until death.

As long as my client lives, the insurance company must send him/her income payments resulting from their annuity investment. Upon their death, payments will cease.

Immediate annuities provide “immediate” income. There are two phases to an annuity: the accumulation phase and the income phase.

With a deferred annuity, assets grow during the accumulation phase. Then, at a certain date, the income phase begins – and payments are made to the annuity holder out of the accumulated principal.

With an immediate annuity, you don’t have to wait years for income payments to start. You put a lump sum of money into the annuity, and the payments begin – usually about a month after you set up the annuity contract. (Some “immediate” annuities let you defer income payments for up to one year.)

As owner of an immediate annuity, you have different payout options. A life-only optiongives you an income for the remainder of your life. Select a joint and survivor option, and you can add a second life to the contract – that is, payments will continue to be issued to your surviving spouse for the rest of his or her life after you pass away. Or, you can simply structure an annuity payout to last a set number of years.

Longevity has its rewards. If you know a little about the insurance industry, you know insurance policies and annuities are structured around projections of life expectancy. With an annuity, if you die sooner than expected, the insurance company won’t have to pay you as much income as projected. If you outlive their projections, they will have to pay you more. So the healthier you are, the more attractive immediate annuities are.

If your immediate annuity is a life annuity (income payments for life), the older you get, the greater those payments will be. (Life expectancy for annuity payout purposes is determined by insurance company experience and not as a result of a physical examination. If you have a joint and survivor annuity, two lives are used in the calculation and the amount of the payout is smaller than with a single life contract.)

Immediate annuity income can also be affected by insurer assumptions. That is, it may be assumed that the balance of the annuity will earn __% interest or a ___% return annually. Lower interest rates or investment assumptions will lead to a lower income stream.

The after-tax advantage. If an annuity is purchased with after-tax money, the income stream comes with significant tax advantages.

Let’s compare and contrast here. In a deferred annuity, all earnings grow tax-deferred during the deferral phase. But when income phase starts and the tax-deferred earnings are paid out, the tax collector wants his fair share.

Since an immediate annuity is paying back both principal and tax-deferred earnings, a portion of each payment is considered to be income, and a portion is considered to be tax-free return of principal. The shorter the payout period, the greater the amount that can be excluded from tax.

Immediate annuities can be used in IRAs that require minimum distributions beginning at age 70 ½. If those assets are invested in an immediate annuity, a lifetime income stream can be assured and the IRS will accept that income stream amount as an acceptable minimum distribution.1

So, does it make sense to annuitize? If you’re healthy, active and mature, an immediate annuity can potentially be a great income source for you. Before you arrange an annuity contract, talk to an insurance agent who understands these strategies thoroughly and can explain available options.

These are the views of the author and should not be construed as investment advice. Neither the named Representative nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information.

Citations. 1 www.irs.gov/publications/p590/ch01.html#d0e1252

Guarantees provided by annuities are subject to the financial strength of the issuing insurance company; not guaranteed by any bank or the FDIC.  16832 | 2520310

This material was prepared by Peter Montoya Inc., and does not necessarily represent the views of the presenting Representative or the Representative’s Broker/Dealer. This information should not be construed as investment advice. Neither the named Representative nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information. www.petermontoya.com, www.montoyaregistry.com, www.marketinglibrary.net