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Annuities can help provide peace of mind in retirement.

Life expectancy for Americans these days is longer than ever. A man who is 65 today has a 75 percent chance of living to 82 while a woman the same age has a similar chance of living to age 84. That means the likelihood of outliving your retirement savings is greater. Thus you need to be financially savvy now so you can maintain quality of life later. IRAs and 401(k) plans are common ways of maximizing retirement income, but annuities have been gaining in popularity lately.

An annuity is an interest-bearing agreement (similar to an account) that is commonly held by a life insurance company, similar to a savings account that is held by a bank. Annuities pay interest – in an amount and per a start date specified in the agreement. There are two types of annuities – immediate and deferred. Here's a snapshot of each.

IMMEDIATE ANNUITY: With this type of annuity, you give a lump sum to an insurance company to be invested, and the firm provides you with a series of payments, starting right away, on the schedule you choose. You can lock in those payments for as long as you like – for a set number of years or for life; it all depends on the size of the lump sum and the payments. For this reason, it is often said that with an immediate annuity, you cannot outlive your money.

Good to know: If you die before all payments are made from the insurance company, you can have remaining payments continue to your spouse or a designated beneficiary.

Who should invest: An immediate annuity can be smart for people who are already retired or near retirement, especially those who want the security of having a fixed payment each month for as long as they want.

DEFERRED ANNUITY: This type of annuity is a tax-deferred investment. You give a lump sum to an insurance company to be invested, and you earn interest on the principal, but your earnings aren't taxable until you start receiving payments sometime in the future. You can convert a deferred annuity into an immediate annuity if your annuity contract permits.

Many insurers offer fixed-rate annuities. These guarantee a minimum rate of return for the length of the annuity contract no matter what happens with the financial markets, making them less risky. Some companies offer variable annuities, where the earnings "vary" with the financial markets.

Good to know: If you end a deferred annuity early or if you withdraw part of your lump sum money before age 59 1/2, you may have to pay a 10 percent federal tax penalty or pay a surrender charge.

Who should invest: Deferred annuities are best for people who want to accumulate money, tax-deferred, and receive their payments later. They provide the best return when you can leave the money in the account untouched for a few years, and are particularly good for people who have maxed out their contributions to other retirement accounts and want another way to set aside money for their golden years or for beneficiaries.

Your AAA life specialist can provide more details. To find one, call (855) 558-5433 or go to AAA.com/life. AAA life specialists do not provide legal, tax, or financial advice.

Robin Jones is a contributor from Long Beach, Calif.

September/October 2016 Issue

ask an agent

Q: Why should I purchase an immediate annuity instead of just managing my money myself?

Agent

A: Even if you budget carefully, you may live longer than you expect. In addition, some investments are unpredictable and do not guarantee your money will be there when you need it. You can help eliminate worries about trying to make your money last by putting a portion of your retirement savings into an immediate annuity. With the lifetime income option, you would have an income stream guaranteed for the rest of your life, regardless of what happens in the financial markets.

– Kerry Loggins
AAA Life Insurance Specialist
Jackson, Miss.


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