By Arnetta Tolley, The Pasadena Journal

Retirement isn’t cheap. You may have heard that you will need 70 percent to 80 percent of your pre-retirement income, but the real figure might even be higher, depending on your circumstances.

And retirement isn’t short, either – you could spend two or three decades as a retiree. Taken together, these factors highlight the need to identify as many sources of retirement income as possible – and one of these sources might be an annuity.

A fixed annuity is an insurance product that allows you to make a lump-sum investment and can provide insured payments to you for a designated number of years, or for life. A fixed annuity guarantees a rate of interest for a stated period that will be unaffected by market fluctuations. Your principal investment and the specified interest rate are guaranteed based on the claims-paying ability of the issuing company.

A fixed annuity offers some key benefits, including the following:

• No contribution limit – No IRS contribution limits apply to non-qualified annuities – that is, annuities held outside a tax-advantaged retirement plan, such as a defined benefit pension plan, Section 403(b) plan (TSA) or an IRA. This can be especially valuable if you are already close to retirement age and think you might be short on savings.
• Tax deferred accumulation – The interest you earn is tax deferred and will compound annually, meaning your money may accumulate faster than it would if it were placed in a taxable investment. Earnings will be taxed at your ordinary income rate once you start taking withdrawals, and withdrawals prior to age 59-1/2 may be subject to a 10% federal tax penalty. (You will want to consult with your tax advisor before withdrawing from your annuity.)
• Income for life – You can take your annuity payout as a lump sum or choose to receive payments for a set number of years, or for the rest of your life. Your income amount will be determined by the value in your contract and your life expectancy.
• Death benefit – If your annuity is still in the “accumulation” phase at the time of your death (meaning you haven’t yet begun collecting payments), it might provide a death benefit to the beneficiary you’ve named. Typically, this lump sum will be the greater of your account balance or the total of all premiums paid, although some annuities provide additional options. Be aware, though, that the death benefit may be taxable.

As is the case with all investments, a fixed annuity does have some caveats. Most important, an annuity is a long-term investment – if you pull money out within the first several years after your purchase, you likely will face some prohibitive surrender charges. These charges decline each year, typically reaching zero after seven years. Such withdrawals also may be subject to a market value adjustment.

One more thing to keep in mind: Different annuities come with different fees, and the higher the fee, the lower your “real” return will be. Consequently, you will want to compare fees before investing.

If a fixed annuity is appropriate for your situation, you may find it can join your other income pools – Social Security, 401(k), IRA, etc. – to provide you with the resources you need to enjoy the retirement lifestyle you’ve envisioned.

Edward Jones is a licensed insurance producer in all states and Washington, D.C., through Edward D. Jones & Co., L.P. and in California, New Mexico and Massachusetts through Edward Jones Insurance Agency of California, L.L.C.; Edward Jones Insurance Agency of New Mexico, L.L.C.; and Edward Jones Insurance Agency of Massachusetts, L.L.C.

This article originally appeared in the Pasadena Journal.