Conservative Savings… Or Lifetime Retirement Income?

Provided by Albion Agencies, Inc., which represents Massachusetts Mutual Life Insurance Company (MassMutual) and other companies, courtesy of MassMutual

If you are approaching retirement, a key element of your retirement strategy may involve choosing the best way to secure a predictable source of retirement income; one that’s guaranteed to be there when you need it, for as long as you need it. As you explore ways to achieve your income goals, you may have considered a variety of conservative financial vehicles designed to protect your retirement nest egg, such as bank savings and money market accounts, certificates of deposit (CDs) or deferred fixed annuities.

Each of these investment vehicles is considered a conservative choice and each offers unique advantages. But only the deferred fixed annuity is specifically designed to provide guaranteed retirement income for your lifetime.*

All conservative accumulation products are not created equal

Let’s start with a few basics.

A deferred fixed annuity is conservative retirement vehicle that is designed to help you accumulate and protect your assets until you are ready to receive them as guaranteed income during retirement. Most deferred fixed annuities allow you to choose whether to receive guaranteed income for a specific period of time, or for your lifetime. Earnings accrue tax deferred until they are withdrawn, allowing your contract value to take full advantage of the impact of compounding interest. Once the annuity benefit is paid, the portion attributable to earnings is taxed.

Certificates of deposit are designed to be a savings vehicle, a conservative way to save and preserve assets when your investment horizon (the amount of time you expect assets to be invested) is relatively short. An example might be saving money for a down payment on a house. CDs typically are short-term vehicles and may not be as efficient at meeting long-term retirement needs. Although the interest from a CD can be used as income, it’s generally necessary to hold the CD until it reaches maturity before you can withdraw the funds without penalty. What’s more, any earned interest is taxable for the current year on an annual basis.

Insured vs. guaranteed – what’s the difference?

Both fixed annuities and CDs are considered low-risk financial vehicles because they guarantee a positive rate of return. However, these guarantees work in different ways:

  • • CDs are generally backed by banks and are insured for up to $250,000 for each depositor by the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Administration (NCUA).
  • • Fixed annuities are guaranteed by the issuing insurance companies, with no maximum. They are not FDIC insured. Be sure to ask your financial professional about an insurance company’s ratings and financial strength if you plan to purchase an annuity, because payment of lifetime income is contingent upon the claims-paying ability of the issuing company or companies.

What if you need some of your money before you retire?

Many fixed annuities allow the contract owner to withdraw a certain percentage of the contract value (typically up to 10% on an annual basis or accumulated interest) without incurring any surrender charges, although tax penalties may apply. Amounts withdrawn in excess of the specified percentage are often subject to surrender charges or adjustments. These charges generally decline each year and expire at the end of a specified number of years. If withdrawals are taken prior to age 59 ½, a 10% federal income tax penalty may apply. Although some CDs may include interest withdrawal provisions, investors generally must wait until the CD matures to avoid early withdrawal charges.

Ask a trusted financial professional

Remember, not every conservative savings vehicle is the same. Fixed annuities offer many of the same features that make other conservative products so popular. In addition, fixed annuities offer other unique advantages that may be beneficial to you. Your financial professional can help you to choose the vehicle that best meets your retirement income objectives and investment needs.

© 2010 Massachusetts Mutual Life Insurance Company.

* Guarantees and payment of lifetime income are based on the claims paying ability of the issuing company.

Annuity products are issued by Massachusetts Mutual Life Insurance Company, Springfield, MA and its subsidiary, C.M. Life Insurance Company, Enfield, CT.

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Albion Agencies, Inc. is a licensed insurance agent/broker only in the State of New York.

The information in this post is general in nature, and geared toward insurance conditions in Western New York.  As always, you should speak with an insurance adviser to determine your specific insurance needs.

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