Preparing for retirement: Test your knowledge about annuities
You’ve likely been saving for retirement for a long time. So you’re probably familiar with the typical ways to build your nest egg—401(k)s, IRAs, investments, and personal savings accounts.
But what about annuities? Test your knowledge about this retirement investment option, and see if it could be a good fit for securing your financial future.
True or false: Annuities can guarantee your income for life.
True. Annuities are insurance for your retirement income. You purchase an annuity with retirement savings you already have, This creates a “retirement paycheck”—providing you with guaranteed income on a schedule of your choosing.
Annuities aren’t just used for income, though. They can be used to save for retirement, too.
True or false: Annuities perform based on the market.
It depends. There are 4 main types of annuities. Some are tied to market performance and some aren’t.
Here’s an overview, and how they might fit into your retirement strategy:
- Fixed annuity: Gives you a fixed rate of return on your investment. A good option if you want to save and grow your nest egg, without worrying about market volatility.
- Income annuity: Provides guaranteed income now (immediate) or in the future (deferred). Ideal if you want to ensure you don’t outlive your retirement savings. Or if you’re at or near retirement and want to start receiving income soon.
- Indexed annuity: Lets you invest in the market without the risk of loss. Consider this type of annuity if you want of some market growth potential without the risk of losing your investment.
- Variable annuity: Focuses on market growth to help maximize your future guaranteed income. This may be the right fit if you want to take full advantage of market growth potential, but are OK with the possibility of a loss, too.
True or false: Annuities are only a long-term investment strategy.
False. While certain annuities are generally meant for long-term investing, some annuities can start paying you right away.
These are called immediate income annuities. You purchase this type of annuity by paying a one-time lump sum, which is then converted into income payments. If you’re retiring soon and want to start receiving guaranteed income within the next 12 months, this could be a good option for you.
True or false: Annuities offer tax advantages
True. Aside from immediate income annuities, all other types of annuities provide tax deferral. This means your contributions (and any earnings) grow tax-deferred until you’re ready to start receiving payments.
Another benefit? Unlike a 401(k) or IRA, there is no annual contribution limit, which is especially beneficial if you need to make catch-up contributions.
True or false: Annuities can provide for your loved ones, too.
True. It just depends on how you choose to receive your income. Deferred annuities pay your beneficiary when you die. This may be in a lump sum, or in installments.
Immediate income annuities have benefit options that return any unused premium payments to a beneficiary. There are also joint or survivorship options, which guarantee income payments for your spouse or loved one for as long as they live, too.
Guarantees are based upon the claims-paying ability of the issuing insurance company.
Withdrawals prior to age 59½ may be subject to a 10% IRS penalty tax.
This document is intended to be educational in nature and is not intended to be taken as a recommendation. Consult with your financial professional to discuss retirement planning.
Before investing in a variable annuity, investors should carefully consider the investment objectives, risks, charges and expenses of the contract and the underlying investment options. This and other information is contained in the free prospectus, and if available, the summary prospectus which can be obtained from your local representative. Please read the prospectus carefully before investing. Contract rider descriptions are not intended to cover all restrictions, conditions or limitations. Refer to rider for full details. Riders subject to state availability and may be subject to an additional charge.
Tax-qualified retirement arrangements, such as IRAs, SEPs and SIMPLE-IRAs are tax deferred. You derive no additional benefit from the tax-deferral feature of the annuity. Consequently, an annuity should be used to fund an IRA, or other tax-qualified retirement arrangement, to benefit from the annuity's features other than tax deferral. These features may include guaranteed lifetime income, death benefits without surrender charges, guaranteed caps on fees and the ability to transfer among investment options without sales or withdrawal charges.
Not FDIC or NCUA insured. May lose value. Not a deposit. No bank or credit union guarantee. Not insured by any Federal government agency Variable Annuities are issued by Principal Life Insurance Company and distributed by Principal Securities, Inc, 800-852-4450, member SIPC and/or independent broker/dealers. Securities sold by a Principal Securities, Inc. Registered Representative are offered through Principal Securities, Inc. Principal Life and Principal Securities, Inc. are members of the Principal Financial Group, Des Moines, IA 50392