Generational changes in the way people work mean that most Americans don’t have an old-style pension plan.
One thing they can do to establish a steady retirement income is establish an immediate annuity. These pay a regular income, either for life or a set period, and in contrast to indexed annuities are unmoved by stock market volatility.
To establish an immediate annuity, the client pays a lump sum to an insurance company. The company then guarantees a set payment to the recipient. It’s easy to set one up and the benefits are immediately clear. There are caveats, though. Once the money is invested, it’s tied up – emergency clauses are sometimes included that allow clawback, but the terms are strictly limited. In return, the investment is protected from the ups and downs of global markets.
Most customers structure their immediate annuity accounts to provide funds to cover basic living expenses. Once this desired payout is calculated, the investment amount needed to establish the annuity can be determined. Online tools are available help people make these calculations.
Inflation riders can be included that adjust the payout. It makes a lot of sense to include this feature into your account, but because it reduces payments in the early years, some people might choose to forgo it.
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People who hold permanent life insurance policies can swap them into immediate annuities via a 1035 exchange. This converts the original death benefit into regular monthly payments. There is no tax penalty for making the switch, but some of each payout could be taxable, based on the ratio of basis to gains. Insurance advisors can provide clarity on this issue and information on a host of other features that can be added to immediate annuities to suit the client’s individual needs and circumstances.
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How to Create Your Own Pension | Kiplinger