Annuities Can Help Build Retirement Savings

If you're already contributing to a 401(k) or other employer-sponsored retirement plan, that's great. But you may need to sock away even more - and one way of doing that is by investing in an annuity. Annuities offer a variety of benefits, including the following: Tax-deferred growth of earnings - When you invest in a deferred annuity, you pay no taxes on your earnings until withdrawal, so your money will grow faster than it would if placed in an investment on which you paid taxes every year. However, if you make withdrawals before you reach age 59-1/2, you may have to pay a 10 percent early withdrawal penalty, plus an additional sales charge. High contribution limits - You can basically invest almost any amount into an annuity, although some restrictions do apply. So, if you've already "maxed out" on your 401(k) or IRA, and you still want to put substantially more money into a retirement-savings vehicle, then you might want to look closely at an annuity. Variety of payout options - An annuity can provide you with an income stream you can't outlive. But you also can decide to accept payments for a certain period of time, such as 10, 15 or 20 years. If you were to die before that period was over, your beneficiary would receive the payouts for the remainder of those years. And some annuity contracts even offer payout options that cover two lifetimes, so that when you die, your spouse can still collect income for the duration of his or her life. Deferred annuities may be either fixed or variable. When you purchase a fixed annuity, you receive a guaranteed interest rate during the "accumulation" phase - the time in which you pay money into the annuity. You can only purchase a fixed annuity with a one-time lump sum. Although you cannot continue to add money to a fixed annuity contract, you can purchase additional fixed contracts. You also will receive a fixed payment amount when it's time to start making withdrawals. When you buy a fixed annuity, make sure you're getting one from an insurance company that's received high safety and stability rankings from the independent rating agencies. This is essential, because annuity guarantees are backed by the claims-paying abilities of the insurer - not by the investment performance or safety of the underlying portfolio. If you want some growth potential, you may be interested in a variable annuity, which can offer a variety of investment options, including pools of stocks or bonds, or a mixture of both. When you start taking withdrawals from a variable annuity, you can either receive a fixed payout, a variable payout or a combination of the two. If you choose a variable payout, the amount of each payment is based on the performance of your investments. Keep in mind, though, that any withdrawals you make before age 59 1/2 may be subject to a 10 percent penalty, along with a possible deferred sales charge. When you purchase a variable annuity, you will incur some risk, as the value of the stocks, bonds or other vehicles within the annuity fluctuates over time. You could end up receiving less than your original investment. Ultimately, the type of annuity you choose will depend on your individual needs, goals, diversification requirements and tolerance for risk. You may even want to own a combination of fixed and variable annuities. In any case, at least consider annuities - they can make your retirement years much more enjoyable. -This article is provided by Jeff Foster, the Edward Jones Investment Representative for Seymour, TN.