As you pull together your records to prepare this year’s tax return, it might mark the first time in a while that you’ve really examined your finances.
If you are one of the many retired Baby Boomers, perhaps the amount of your interest income caught your eye. You were probably surprised, because if you’ve got $100,000 of your retirement assets in a bank savings account, the tally of monthly interest amounts to a little more than $20 per month. For the year, you earned around $250.
And that’s not likely to change for a while. Gone are the days when you could invest a significant amount of your retirement savings in a five-year Certificate of Deposit and earn 5%.
Today, it’s almost like you are paying the bank to hold your money. (In Japan, that has been the case for years and Europe has recently taken initial steps in this direction.)
What if you could make your money work for you again? Instead of earning $20 a month, a check for $600 (if you’re a 72-year-old male) is deposited into your account every month – for the rest of your life.
That’s the kind of transformation that happens when you invest in an income annuity. You can convert a retirement asset paying virtually no interest into a retirement income vehicle paying nearly 30x more.
Myths about Income Annuities
As you research this option, you will come across information that suggests income annuities are not in your best interest.
Annuity Myth #1:
Taxes will eat up the higher income from an income annuity.
My answer: An income annuity enjoys favorable tax treatment when purchased out of personal savings. In the case above, of the $600 monthly payment, less than $60 is taxable for the next 16 years.
Further, as a retiree you are no longer earning a salary, so your overall tax rate is likely to be much lower than it was when you were working – possibly in the 15% to 20% range.
With those factors combined, you might pay taxes of $12 per month on that $600 payment for the next 16 years. When the payment becomes fully taxable later on, a likely scenario is that you have offsetting deductions for medical and other care.
Annuity Myth #2:
Don’t lock up your money in an income annuity now. You’ll be better off by waiting to buy a five-year CD when interest rates go up.
My answer: What if interest rates don’t increase? While you are waiting, you lose cash flow that the income annuity would pay you.
Say you think interest rates will rise to a reasonable rate in three years.
You can wait, and bring in that $20 a month or you can invest in an annuity today that pays $600 per month. Three years from now, you will be more than $20,000 ahead. Importantly you will have locked in that $600 per month for life. (Of course, you can always split your purchase of an annuity with some today and the balance in the future.)
Annuity Myth #3:
When you give your money to an insurance company, you might never see it again.
My answer: Annuities can be structured in many ways to suit your life situation. You could have the income continue to a surviving spouse.
Or you can elect an option that guarantees that any premium you pay is recovered by you or your heirs if you don’t live long enough.
In the case above, at least $100,000 will be paid out, meaning the lowest return is 0%.
Getting the Best Information
Getting the most out of retirement requires some thought, and sometimes an adjustment in your plans to address changing economic conditions. Plan to use your savings to enjoy your life, and use the tax season to begin making plans for the future.
If you have questions about annuities and how they might help meet your retirement objectives, write to me at Ask Jerry.
Or if you’d prefer to do more research on your own, take a look at the useful tools and information we offer in our Current Income Learning Center at Go2Income.com.