Most of the time when we talk about annuities,* we talk about them in the context of retirement. There’s good reason for that—annuities can provide a way to hedge against rising healthcare costs or fill the void between social security and your fixed monthly income. But there are broader uses and implications for annuities you may want to explore when it comes to covering the costs of other life events or anywhere a guaranteed monthly sum would come in handy.† In other words, they’re not just for retirement anymore. Let’s explore.
Using an annuity to leave a legacy.‡
Perhaps you’ve heard of a charitable gift annuity? It’s a sum of money you put in trust today (i.e. giving it away) with the intent of benefitting a favorite charity or family foundation long-term. While you’re alive, you can receive income from the trust (how much depends on your age and the sum you put aside, though minimums are often $10,000 or more), or it can be set up to provide a life insurance pay out for your heirs. When you pass away, the principal flows to the charity reducing the value of your estate, which may be helpful in reducing estate taxes, too. If you fund the trust with appreciated stock instead of cash, it could also be a way to save on capital gains taxes (when the charity sells the stock, it doesn’t have to pay taxes on the gain like you do). And, you get a tax deduction for making the gift to the trust in real time. Although many charities will be happy to walk you through the numbers, it’s also a good idea to talk to a financial advisor before making this move.
Using an annuity to provide a stream of financial support for family members who need it.
As you look to the future, do you see family members in need of a consistent and guaranteed income? For example, are you worried about aging parents, or perhaps a special-needs child? Perhaps you have a child or spouse who has shown a tendency to overspend in the past, or who may suffer from addiction. Annuities with optional benefits can be structured to provide an income stream for a finite period of time or an unknown one (as lifetimes tend to be). Because they only pay a certain amount each month—structured products can’t be cashed out for a lump sum once you annuitize—they also offer nice built-in protection against blowing out your budget.
Using an annuity to help with college, wedding or other future (large) expenses.
Maybe you’re the sort of grandparent who always felt like you’d help pay for college, graduate school, even the nuptials (or honeymoons) of your offspring. Annuities that you set up now to pay out down the road can help you make sure your resources are there to help achieve these goals—even if you’re not. Or, even if you fully expect to attend the celebrations, annuities can help you save for a meaningful gift, tax-deferred.‡‡ For example, you might choose an annuity that offers a limited payout schedule (say, four years, or more, if you plan to cover graduate school). Decide how much you’d like your beneficiary to receive each year, and chat with your financial advisor to determine how much you need to invest so that the tuition payments will offer your desired amount.
Using an annuity to help reduce retirement risk.
The majority of Americans—78 percent—say they're 'extremely' or 'somewhat' concerned about not having enough money for retirement, according to Northwestern Mutual’s 2018 Planning and Progress Study.1 The same study showed that 67 percent believe they’re on a trajectory to outlive their savings. While it’s true that “risk” means something different to everyone, retirees face a more complex picture than those of us still working—when there’s no new money coming in, running out is a distinct possibility, especially when you consider the rising cost of healthcare. (Which today is projected to be $280,000 per couple in retirement, roughly $5,000 per person per year over 30 years of retirement).2 If you’re worried that your money might not last, or you just like the comfort of knowing a check will be coming your way every month, transforming a lump sum into a retirement paycheck that will cover your fixed costs is something to consider.
Talk to your financial advisor.
Finally, when it comes to making complicated—and long lasting—decisions particularly around points of life transition (college, marriage, retirement), having a financial planner in the picture is a good move. Tell them exactly what goals you have for retirement, for your family, and for the legacy you plan to leave behind. They can tell you what steps you need to take in order to get there, and determine which products are in your best interest.
Kathryn Tuggle contributed to this story.
*What is an annuity?
Annuities are long-term, tax-deferred investments designed for retirement. Variable annuities involve risks and may lose value. Earnings are taxable as ordinary income when distributed and may be subject to a 10% additional tax if withdrawn before age 59½. Optional benefits are available for an extra charge in addition to the ongoing fees and expenses of the variable annuity.
Annuities are not for everyone. And, it’s important to remember that these products are meant to be long-term investments designed for retirement, so there are restrictions in place to discourage you from withdrawing all of your money at once or taking withdrawals before age 59 1/2. However, most annuities do allow for exceptions based on specific circumstances such as a terminal illness or other emergencies.
† Guarantees are backed by the claims paying ability of the issuing insurance company.
‡ Optional benefits are available for an extra charge in addition to the ongoing fees and expenses of the variable annuity.
‡‡ Tax deferral offers no additional value if used to fund a qualified plan, such as a 401(k) or IRA, and may not be available if owned by a “non-natural person” such as a corporation or certain types of trusts.
The opinions and forecasts expressed are those of the author and individuals quoted and should not be construed as a recommendation or as complete.