How to Change Your Retirement Portfolio for Superior Results

A happy retirement begins with the security of knowing that a person’s retirement income will not outlast their life.  Many sites give early retirement tips but fail to take into consideration that the average retiree is now living longer.  Retirement calculators that show workers how they can enter early retirement fail to take into consideration the constant flow of income that will be needed once a person’s 401(k) or spouse’s pension ends.  There is one solution to this problem:  Annuity investment.

Securing Long-term Investments

As one source of long-term investments, a person’s retirement might contain a mixture of 401(k)’s, the family home, or even CD’s.  One type of investment to consider adding to this mix is an annuity.  If the objective is to save for retirement, a 401(k) or 403(b) can quickly reach the maximum contribution levels in a year, an annuity is a solid investment choice depending on investment objectives and risk tolerance.

Fixed interest annuities are best suited for those individuals who:

  • Prefer to rely on fixed rates of return
  • Focus on preservation of assets
  • Want protection from market volatility
  • Prefer to delegate investment decisions and risks to insurance companies or other investors
  • Understand that a fixed rate of return may not provide the best hedge against inflation

Variable annuities may be best suited for individuals who:

  • Prefer to invest in equities
  • Want to make their own investment decisions
  • Understand that assets can decline in value
  • Are willing to assume the risk of loss of principal in exchange for the possibility of greater asset growth and a stronger hedge against inflation

Indexed annuities may be best suited for individuals who:

  • Are averse to risk
  • Understand that a stock market linked rate of return contains the highest level of money making and money losing potential
  • Know that if an indexed annuity is surrendered early, a hefty fee will be incurred
  • Prefer to delegate investment decisions to others
  • Want less market risk than with a variable annuity

Comparing Fixed Interest, Variable, and Indexed Annuities

To help with the decision-making process, a comparison of the three different types of annuities may provide investors with assistance.

  • Minimum guaranteed rate of return:  While a fixed interest and indexed annuities offer a guaranteed minimum rate of return, a variable annuity does not.
  • Choice of investment options:  A variable annuity is the only one of the three that allows investors the opportunity to choose their investment options.
  • Possibility of losing principal:  A variable annuity poses the possibility of losing the initial invested principal, while a fixed interest annuity does not.  Depending on the contract wording in the indexed annuity determines if it can lose principal.
  • Tax-deferred growth:  All three types of annuities allow for tax-deferred growth.
  • Minimum death benefit:  All three types of annuities allow for a minimum death benefit payable to heirs.

It should be noted that a minimum guaranteed rate of return is based on the claims-paying ability of an issuing insurance company.  It is also possible to lose principal investment in an indexed annuity if the annuity is not guaranteed for 100% of the principal and no index-linked interest is credited or the annuity is surrendered early.

Immediate Annuities vs. Deferred Annuities

An immediate annuity is payable immediately after purchase, whereas a deferred annuity normally waits until future predetermined date.  There are some very important differences between immediate and deferred annuities.

  • Premium payments:  An immediate annuity is purchased in full with a single premium only, whereas a deferred annuity can be purchased with a single premium or a series of installment premiums.
  • Annuity payout:  An immediate annuity begins immediately, while a deferred annuity will accumulate interest and begin at a future date.
  • Partial withdrawals:  Depending on the wording of the initial contract, an immediate annuity may allow for partial withdrawals under certain circumstances.  A deferred annuity allows for partial withdrawals.  Yet again, these are based on the contract wording and are also subject to a premature withdrawal tax if made before age 59 ½.  These withdrawals will also reduce the value of any death benefit and future payouts.
  • Surrender value:  An immediate annuity cannot be surrendered, while a deferred annuity can be surrendered for its value taking into consideration any premature withdrawal taxes to be paid.

The Annuity Income Phase

After purchasing an annuity, when the owner is ready to begin receiving income, there are a variety of withdrawal options, such as:

  • Lump Sum Distribution
  • Systematic Withdrawals
  • Annuitizing
  • Other Options

Lump Sum Distributions

A deferred annuity can be received in one lump sum payment.  This option requires an income tax payment be received on the annuity earnings the year that the funds are received.  In addition, receiving the funds in a lump sum defeats the purpose of the annuity:  to provide a source of income that cannot outlive a person’s retirement.  If a person wishes to receive a lump sum payment at retirement, they should discuss other options with their financial investor.

Systematic Withdrawals

A specified amount of money, withdrawn at regular intervals until all assets have been withdrawn, can be set up as a systematic withdrawal plan.  For example, a retiree can withdraw $1,000 monthly until all assets have been withdrawn.  However, once all funds have been withdrawn, the payments will stop.  For income tax purposes, these withdrawals are subject to ordinary income tax rates.


Converting the value of a deferred annuity into a lifetime stream of income or income for a fixed period of time is available through annuities that are annuitized.  There are various types of annuity income options with this type of annuity, depending on the owners’ needs and wants at retirement.  

Other Options

Discuss all options with a highly qualified financial advisor.  They can assist those who are considering an annuity with the best type of annuity to fit the retiree’s situation.  In addition, a financial advisor may assist future retirees with the right types of retirement investments that will allow for them to receive more money at retirement while assuring that they will not outlive their retirement income.

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