In the last article we went over the two different types of annuities, fixed and variable; both are avenues by which you are able to grow assets on a tax deferred basis over time. Now we are going to talk about the different ways you can receive or build to later receive a steady stream of retirement income payments.
The contract owner can implement one of two strategies, an immediate annuity or a deferred annuity. They can elect to begin to receive income right away with an immediate annuity, or to build their account value over time and convert it to income at some point in the future with a deferred annuity.
A contract is considered to be an immediate annuity if income payments are scheduled to begin one payout interval after the annuity’s purchase date. This is what is known as annuitizing the contract. It is important to understand the key term, annuitant. An annuitant is the person whose life the payment stream is based on. It is also important to understand the key term annuitization. Annuitization is the process of converting an annuity into a series of periodic income payments. This type of annuity is designed for regular cash flow. With an immediate annuity, a single lump-sum payment is made. This one-time payment initiates the starting date for the payout to begin (sometime within the next 13 months). The size of the payout that the annuitant will receive is based on the annuity’s principal, the payout option selected, the payout term, the annuitant’s age and whether it is a fixed or variable contract. You can choose income for your lifetime or for the joint lifetime of yourself and that of another person. An immediate annuity can be the ideal choice for an investor who fears they might outlive their resources or someone that just simply wants to receive regular income payments. It is also crucial that the contract owner be aware that annuitization is an irrevocable action.
On the contrary, a deferred annuity gives you the opportunity to build your retirement savings over a period of time. A contract is considered to be a deferred annuity if the income payments are scheduled to begin at some later point in the future. With this strategy, the contract owner is essentially deferring the time in which they will begin to receive the income payments (annuitize). This deferred account can be funded with either a lump sum, a series of payments, or even both. The contract owner will have the option to either annuitize the contract or lump sum it out in the future. With this type of annuity you have the ability to accumulate wealth over an extended period of time. One also has access to their money at any time, up until annuitization. However, it is important to know that these withdrawals may incur early withdrawal tax penalties. The deferred annuity is best suited for that investor who has already maxed out all of their other retirement plans such as 401(k)s and IRAs.
By design, an annuity is meant to secure a steady cash flow for an inpidual during their retirement. Each of these annuities have their own advantages and disadvantages. Before choosing between an immediate or a deferred annuity, one must decide if they are looking for a regular stream of income payments or if they want to accumulate wealth. Due to the complex nature of an annuity contract, it is important for investors to be properly educated before they invest in such a contract.
If you have maxed out all of your other retirement plan options or if you simply want to accumulate wealth, call Mitlin Financial, Inc. today at (631) 952-4466 and educate yourself on what may be a great addition to your retirement plan.
Disclaimer: This article represents the opinion of Mitlin Financial Inc. It should not be construed as providing investment, legal and/or tax advice.