Feature Article - Preparing for the Future

FEATUREARTICLE

Preparing for the Future

Annuities can help moldmakers manage their income during retirement.

By Daryl Kersting

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For more information contact Daryl Kersting, financial consultant for A.G. Edwards & Sons, Inc. (St. Louis, MO), Member SIPC, at (800) 926-9223 or via e-mail at daryl.kersting@agedwards.com.

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As investors, we all have financial goals we would like to achieve. Some of these goals may include funding our children's educations, buying a dream home or making sure that our loved ones are protected in the event of an untimely death. One universal goal many investors share is making sure we have the financial security needed to enjoy a comfortable retirement. When you have left your shop days behind you, you will still have the job of managing your income effectively during your retirement years.

This task may prove more difficult now than it has in past generations. Americans are living longer than ever before, so money must last longer. In fact, the time spent in retirement may equal or even exceed your working years.

Living expenses also have outpaced Social Security benefits. In 2000, according to the Social Security Administration, the average retired worker received a monthly Social Security benefit of only $804, or nearly $10,000 a year. If your preretirement income was more than $10,000 per year, this amount may not be enough to maintain the lifestyle to which you are accustomed.

A Present Solution
Annuities may be able to reduce the impact of some of these issues. Usually, withdrawals of earnings are fully taxable and, if taken before the age of 59½, subject to a 10 percent IRS penalty. However, any earnings in annuities are tax deferred, making them excellent investment tools to help build wealth for retirement. Annuities also can help to generate an income stream during your retirement years.

Income for Life
An annuity is the only investment vehicle that can guarantee-backed by the claims-paying ability of the issuing insurance company-a lifetime income stream for one or two people, or for a certain period of time. This income option is called annuitization. If you invest after-tax money, you will receive a tax-advantaged income stream where you only pay taxes on the portion that is earnings. There are two types, depending on your investment objectives:

1. Fixed income for life. If you want to know exactly how much you will receive each payment, a fixed payment stream may be an appropriate choice. The amount of income is based on factors such as your age, investment amount and length of time you receive payments.

2. Variable income for life. With this, your income has the potential to increase over time. This is one way your income may keep pace with inflation. The payment amount is based on the performance of the investment options you choose and will fluctuate with that performance; therefore, it could be more or less than your original investment.

3. Systematic withdrawals. You can withdraw a specific dollar amount from your annuity on a monthly, quarterly, semiannual or annual basis. Systematic withdrawals give you the flexibility to withdraw money when you need it and specify the amount you need. There are no income guarantees with systematic withdrawals. Therefore, if you withdraw more than you earn, you run the risk of depleting your annuity assets and potentially outliving your income. Also, keep in mind, as was previously mentioned, withdrawals before age 59½ are subject to penalty from the IRS.

The benefits of an annuity may help you meet some of your retirement income needs. As always, before selecting any investment, you should work with your financial consultant to develop a personal financial plan that will meet your long-term financial goals.