Retirement & Financial Planning Report

Seniors who are dissatisfied with low investment yields might want to consider an immediate annuity. You give money to an insurance company and receive a certain amount for a specified time period. You might get a lifetime payout or one that’s limited to a number of years.

Suppose you buy an annuity for $300,000, saying that you want it to last for the rest of your life. Depending on your age, you might get $18,000 a year from that annuity, or 6% of your principal.

That $18,000 won’t all be taxable. Instead, some will be a return of your investment. If you have a 20-year life expectancy when you buy the annuity, each year you’ll get a $15,000 ($300,000 divided by 20) return of your investment. Only $3,000 will be taxed, in this hypothetical example.

What’s more, only $3,000 will be counted in your total income, for the purpose of calculating the tax on your Social Security benefits. Thus, buying an immediate annuity can provide cash flow in retirement while minimizing the tax you’ll owe on your Social Security benefits.

On the other hand, with the type of annuity described above, there may not be anything left for loved ones after your death.