What is the American Annuity? The pros and cons of annuities in the United States, which retirement plan is suitable to invest in?
In the United States, if you want to retire, you need to start planning for retirement savings long in advance. Everyone knows more about them, such as the 401K, IRA, etc. that the company pays with you, which are a kind of retirement plan. An annuity is also one of many retirement plans, which is called a pension “safe deposit box”.
Retirement plans in the United States are mainly divided into three categories, including Social Security, company and government pensions, and individual pensions (including 401K, IRA, etc.). Typically, the 401K is chosen by the company, and the IRA plan is chosen by the individual. Put money into a retirement account every month, choose and invest in various product portfolios in the market by yourself (or find professional investors), and be responsible for your profits and losses according to the market conditions.
An annuity is a contract between an individual and an insurance company. It is a retirement stored value tool provided by the insurance company. Relatively speaking, no matter what the market conditions are, the risk is relatively small. After purchasing an annuity, the insured can receive a certain amount every month at the age of receiving it until he dies. If the insured is still in good health after the insured amount is exceeded, the insurance company needs to keep paying.
- Annuities can be tax-deferral. The money put into the account can be temporarily exempted from tax as long as it is not withdrawn, and the tax will be paid when the pension is received. This brings many benefits. Usually, the tax rate after retirement will be lower than when you are working; and you do not need to pay taxes every year, and the final income of rolling profits must be higher than paying taxes every year.
- Unlike 401Kor IRA, the deposit of annuity is not online, which means that you can put in a reasonable amount according to your needs.
- Money from other retirement accounts can be transferred into the annuity in one lump sum. Many annuity products pay dividends in the first year or many years after, depending on the specific years of payment.
- In addition to the life-long retirement income of the policyholder, a beneficiary can also be designated, and if the policyholder dies before receiving the annuity, the beneficiary can receive the full principal. Of course, if the insured person dies when there is still an unpaid balance in the account, the beneficiary can continue to receive it.
When to buy an annuity?
- When the stock market is volatile. The stock market is relatively risky. If you feel that this risk exceeds your psychological expectations, an annuity is a good choice.
- Don’t expect large returns but seek stability, especially expect to see predictable returns.
- Life Insurance cannot be purchased.
- Hope to have a long-term stable income and a more complete retirement plan after retirement.
Buying Annuity Notes
Types of annuities
Annuities generally fall into the following three categories:
- Variable Annuity: It is an investment annuity with high risk and high return. Insurance companies generally do not guarantee investment returns. The amount paid to annuity recipients varies according to market conditions.
- Fixed-income annuity (Fixed Annuity): After deducting a certain fee, the insurance company invests in a relatively conservative investment account, and pays the beneficiary according to the contracted fixed interest rate.
- Index Annuity: Determines returns based on stock market index performance. If the linked stock index rises, the annuity beneficiary will receive the income above and below the contract income; if the stock index falls, then the minimum yield guaranteed by the contract will be received.
Suitable for people who buy an annuity
- People with early retirement plans;
- Those who are worried about risky investment plans such as the stock market;
- 401K, IRA, and other investments reach the up-line or insufficient people
Annuity Purchase Steps
- Get a quote from the insurance company according to your situation
- Choose an annuity model that suits you, weigh benefits, and more
- signing the contract
Typically, fixed-income annuities and indexed annuities have low, or even zero, fees. However, the fees for floating income annuities are relatively high, as follows:
- to compensate insurance companies for the risks of their investments;
- Account management fees charged by insurance companies, usually 1.5%, are charged regardless of market conditions.
- Administrative fee, etc.
Withdrawal of annuity
Annuity withdrawals are required to start after age 59.5 according to the IRS, otherwise, there is a 10% penalty. There are several ways to receive an annuity:
- one-time extraction;
- The insurance company guarantees that the insured will receive a certain amount every year within a certain number of years; if the insured dies during the process, a designated beneficiary can continue to receive the remaining years;
- The insured will receive it for life and receive a certain amount every year until his death. But no one can continue to receive an annuity after death. This means that if the insured dies early, the investment will become a loss.
In the United States, people generally start planning their retirement life and financial resources after retirement well in advance. Vivian himself usually invests in 401K and IRA. Although there are not many savings, he hopes to gradually accumulate more and more, and move towards financial freedom as soon as possible!