The bottom line is
that annuities may
be seen as a full
or partial solution,
since they can offer
but they're not right for everyone.
These are just a few of the options worth
considering— there are many more. You
should not invest in any of these options
without a full understanding of the
advantages and disadvantages the
option offers, as well as an understanding
of how any earnings are taxed.
Before investing in
a mutual fund or ETF,
expenses of the
available in the
can be obtained
from the fund.
Read it carefully
All investing involves risk, including the possible loss of principal.
A well-thought-out asset allocation in retirement is essential. But consideration
must also be given to the specific investments that you choose. While it's impossible to discuss
every option available, it's worth mentioning investment choices that might have
a place in the income-producing portion of your overall investment strategy.
Immediate annuities are a common investment option for retirement income planning primarily because they provide the opportunity to receive a stream of income for the rest of your life, based on the claims-paying ability and financial strength of the annuity issuer. Immediate annuities typically provide the choice of receiving a steady income for a fixed period of time or for the rest of your life, or for the joint lives of you and another. Immediate annuity payments begin within one year from your investment in the annuity and once payments begin, they typically can't be changed, although some exceptions may apply. The amount of each annuity payment is based on a number of factors including the amount of your investment (premium), your age, your gender, whether payments will be made to you or to you and another person, and whether payments will be made for a fixed period of time or for life. Most immediate annuity payments are for a fixed amount, so they may not keep up with cost of living increases or your changing income needs. Also, if you select a life only payment option without a survivor benefit, you may not live long enough to receive payments at least equal to your investment in the annuity.
Generally, annuity contracts have fees and expenses, limitations, exclusions, holding periods, termination provisions, and terms for keeping the annuity in force. Most annuities have surrender charges that are assessed if the contract owner surrenders the annuity. Withdrawals of annuity earnings are taxed as ordinary income. Withdrawals prior to age 59½ may be subject to a 10% federal income tax penalty.
A bond portfolio can help you address investment goals in multiple ways. Buying
bonds (which are essentially IOUs) at their face values and holding them to maturity
can provide a predictable income stream and the assurance that unless a bond issuer
defaults, you'll receive the principal when the bond matures. (Bear in mind that
if a bond is callable, it may be redeemed early, and you would have to replace that
income.) You also can buy bond mutual funds or exchange-traded
funds (ETFs). A bond fund has no specific maturity date and therefore behaves differently
from an individual bond, though like an individual bond, you should expect the market
price of a bond fund share to move in the opposite direction from interest rates, which can adversely affect a fund's performance. Bond funds and ETFs are subject to the same inflation, interest-rate, and credit risks associated with their underlying bonds.
Dividend-paying stocks, as well as mutual funds and ETFs that invest in them, also
can provide income. Because dividends on common stock are subject to the company's
performance and a decision by its board of directors each quarter, they may not
be as predictable as income from a bond. Dividends are typically not guaranteed and could be changed or eliminated. Dividends on preferred stock are different;
the rate is fixed and they're paid before any dividend is available for common stockholders.
The amount of a company's dividend can fluctuate with earnings, which are influenced by economic, market, and political events. Dividends are typically not guaranteed and could be changed or eliminated.
Other options worth noting
Certificates of deposit (CDs): CDs offer a fixed interest rate for a specific
time period, and usually pay higher interest than a regular savings account. Typically,
you can have interest paid at regularly scheduled intervals. A penalty is generally
assessed if you cash them in early.
Treasury Inflation-Protected Securities (TIPS): These government securities
pay a slightly lower fixed interest rate than regular Treasuries. However, your
principal is automatically adjusted twice a year to match increases in the Consumer
Price Index (CPI). Those adjusted amounts are used to calculate your interest payments.
(U.S. Treasury securities are guaranteed by the federal government as to the timely payment of principal and interest.)
Distribution funds: Some mutual funds are designed to provide an income
stream from year to year. Each fund's annual payment (either a percentage of assets
or a specific dollar amount) is divided into equal payments, typically made monthly or quarterly.
Some funds are designed to last over a specific time period and plan to distribute
all your assets by the end of that time; others focus on capital preservation, make
payments only from earnings, and have no end date. You may withdraw money at any
time from a distribution fund; however, that may reduce future returns. Also, payments
may vary, and there is no guarantee a fund will achieve the desired return.
The FDIC insures CDs and bank savings accounts up to $250,000 per depositor, per insured institution.
The principal value of Treasury Inflation-Protected Securities fluctuates with changes in market conditions. If not held to maturity, TIPS may be worth more or less than their original value. Unless you own TIPS in a tax-deferred account, you must pay federal income tax on the income plus any increase in principal, even though you won't receive any accrued principal until the bond matures.