How to Maximize Earning Power for Retirement

Earning power, or earning ability, is one of the most valuable assets a person can possess.  Amazingly, if a family’s average income is $100,000 for their entire working career, a 30-year-old couple will earn 6.5 million by the age of 65.  So, how can the average worker maximize their earning power to maximize their retirement income?

Future Earning Power

There are four categories where earning power can be found:  Personal income, investment income, spousal income, and other income.

Even if a person starts later than age 30, they can still realize a hefty sum at the end of their working career.  Although the earlier a family starts saving for retirement, the more powerful their earning potential becomes at retirement.

If a couple waits until 10 years before retirement to begin maximizing their combined income of 100,000, they can still retire with $1,000,000.  With factors such as Social Security, retirement pensions, and life insurance, a retired couple can find themselves maintaining their standard of living with proper planning and forethought.

Three questions every working person should be asking about their retirement include:

  • How much of this money will be available when I retire?
  • How can I systematically accumulate money for retirement?
  • How can I guarantee a retirement income that I will not outlive?

Annuity Objectives

Two basic objectives are satisfied by an annuity in planning for financial security in retirement:

  • Accumulate retirement assets on a tax-deferred basis.  For those who are contributing the maximum to IRAs and employer-sponsored retirement plans, but feel that they still need to save more for retirement the solution is a deferred annuity.
  • Conversion of retirement assets into an income that cannot be outlived.  An immediate income annuity can be used to convert existing retirement assets into a lifetime income.

Revealing the Annuity Savings Plan

An annuity is a long-term savings plan that uses assets to accumulate tax-deferred money for retirement or a retirement stream of income.  An annuity is often thought of as the opposite of life insurance:

  • Life insurance provides financial protection if a person dies prematurely.
  • An annuity provides financial protection for a person outliving their retirement.  

Annuities are classified in several different ways, including:

  • When annuity payments begin
  • How annuity premiums are paid out
  • How premiums from annuities are invested

For those who are currently contributing the maximum amount to an IRA and an employer-sponsored retirement plan, the annuity solution is an excellent vehicle to save for even more financial security during retirement.

The Best Choice for an Annuity

Based on the particular retirement needs, when to begin annuity payments will help decide whether to choose a deferred annuity or immediate annuity.

With deferred annuities, there are two distinct phases:  the accumulation (savings) phase and the income phase.  During this phase, annuity premiums, minus any charges, accumulate on a tax-deferred basis until the start date of the annuity.  The tax-deferring earning power on deferred annuities is one of the major advantages that other non-qualified financial products cannot provide.  

Once the annuity start date occurs, a deferred annuity switches from the savings phase to the income phase.  During this phase, the value of the annuity is converted into a steady stream of income.

With immediate annuities, there is only one phase:  the income phase.  A one-time purchase from a single premium is used to purchase an immediate annuity.  This is immediately converted into a stream of income immediately after the annuity is purchased.  

Comparing Installment and Single Premium Annuities

There are obvious differences between an installment premium annuity and a single premium annuity:  the way that they are paid and accumulation period.

Installment Premium Annuities

  • With an installment premium annuity, the annuity premium is paid in installments to the insurance company over a set period of time.
  • The installment premium can be paid on a fixed schedule or a flexible schedule.  A fixed schedule sets a fixed payment amount to be paid on a regular basis, while a flexible schedule allows payments to vary which is set in the contract limits.
  • During the savings or accumulation period before retirement, the accumulation of assets continues to build on any installment premiums, less any applicable charges.  Any increase in the value is tax-deferred until the annuity start date.
  • Once the annuity start date arrives, the value of the annuity is converted into a steady stream of income.

Single Premium Annuities

  • With a single premium payment, an annuity is purchased.
  • The income stream can begin immediately or deferred until an agreed upon date, such as retirement.
  • Based on the annuity contract, a single premium deferred annuity has an accumulation or savings period prior to retirement.  This single premium amount, less any applicable charges, accumulates on a tax-deferred basis, until the annuity start date.  The annuity value then is converted into a stream of income for the retiree.
  • With a single premium immediate annuity, the single premium less any applicable charges is converted to a stream of income immediately.  
Other Annuity Considerations

With many different types of annuities to choose from, such as fixed interest, variable, and indexed annuities, consultation with an experienced financial advisor is needed.  Nuisances such as premium payments, accumulation phases, income phases, and other particular needs of a retiree should be discussed and options weighed.  

Depending on your particular situation and retirement wishes, the type of annuity, how the income will be disbursed, additional life insurance options, and other choices pertaining to retirement income can be decided with the help of a knowledgeable financial advisor.

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