Annuity vs IRA

Retirement investment decisions have become increasingly  complex as fewer employees are covered by traditional, employer-sponsored  pension plans. The shift to 401(k) plans has presented new retirees with  difficult choices, including the annuity vs IRA decision. When investigating  the issue of annuity vs IRA, several things must be taken into account.

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Choices

At retirement, workers can take all of their 401(k) monies  and roll them into an IRA. If they do this, they will have to manage their  assets well to get a good rate of return. Workers may also convert their 401(k)  funds into an annuity provided by their employer or by an insurance firm. If  they do this, they have the potential for receiving a guaranteed, lifelong, monthly  income payment. In volatile economic times, many individuals opt for the  security offered by an annuity plan. Others dislike the lack of investment  control available in an annuity, selecting to take the entire 401(k) payout in  a lump sum and transferring it to an IRA. There is the risk that poor  investment management on the part of these investors could mean they will  outlive their money, especially if the market drops.

Security vs Risk

Many investors find annuities too restrictive in a world  characterized by change. For example, the health status of an individual is  likely to change in retirement. This makes the IRA attractive because the  investor can withdraw money to pay medical costs not covered by health  insurance. The lifetime guaranteed income of an annuity might be less  attractive if life expectancy is low. Some annuities can be set up to cover  designated beneficiaries after the contract owner dies, but the owner receives  smaller payouts while he or she is alive. Conversely, the amounts remaining in  an IRA after the death of the owner can be left to a spouse who will have to  pay taxes on withdrawals under $1 million. Other heirs must pay estate taxes on  amounts of $1 million or more.

Don't Just Shop, Implement a Solid Retirement Strategy

Purchasing an annuity is a big decision. Online research is a good start, but prudent investors should discuss all their options and risks with an independent financial advisor. Request a free, no-obligation consultation today, along with a report of current rates on brand-name annuities.

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Employer Annuity  Plans vs Insurer Annuity Plans

Employers can help their retirees establish an annuity, if  that is their preference. Employers that maintain cash balance plans often  offer an immediately annuity option. Some will annuitize a 401(k) plan, with  the payment amount depending on the initial investment amount, estimated  return, and retiree life expectancy.

It is usually better for women to take an  employer’s annuity plan than buying one for themselves, since employers must  calculate payments based on the average life expectancy of both genders.  Insurers generally use separate mortality tables for each gender, and since  women have longer life expectancies, they receive lower monthly payments based  on these calculations.

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