How Can You Use a Life Annuity As Part of Your Retirement Planning?


Quick Answer

A life annuity pays out a certain amount on a regular basis, usually monthly, explains Investopedia. This creates a stable income stream, which assists in arranging budgets in advance.

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Full Answer

A life annuity is available as a series of payments that lasts for the lifetime of one person (a single-life annuity) or that continues paying out to a designated survivor after the death of the first annuitant, states the Thrift Savings Plan. The latter type is called a joint-and-survivor annuity, and it offers a lower monthly benefit than a single-life annuity, CNN Money explains. Despite the lower amount, a joint-and-survivor annuity may be preferable as the payment period is longer; for example, it may be a good option for individuals whose other savings are limited. Typically, changing between the two plan types is not possible.

The chief advantages of annuities in general are that they allow tax-deferred growth without any contribution limits, according to CNN Money. Like some types of retirement plans, contributions withdrawn from an annuity are not taxed as the earnings that went into them have already been taxed, invested amounts grow tax-free, and there is no limit to the amount that can be contributed to an annuity — unlike a 401(k), an IRA or a similar type of account.

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