| ||||||||||||
You can’t depend on your small business to offer a predictable amount of future retirement income. And the same is true for your equity investments, particularly if you’re unfortunate enough to retire during a bear market. But there is one financial product that can provide a guaranteed income for life — a deferred fixed annuity.
A deferred fixed annuity can offer benefits similar to those of a traditional corporate pension. In other words, it produces a dependable stream of retirement income that can continue as long as you live, or as long as you and your loved one live. You can elect to receive income on a monthly, quarterly, semi-annual, or annual basis, and the amount of each payment will be the same. (Related: Types of annuities explained: A comprehensive guide)
How a deferred fixed annuity works
Before income payments begin, you fund the annuity by making purchase payments. Unlike qualified retirement plans, there is no annual IRS cap on contributions to a nonqualified deferred fixed annuity, and purchase payments are not income tax deductible. Your annuity savings grow steadily (minus withdrawals), compounding on a tax-deferred basis and earning a competitive interest rate, with no exposure to the stock market. The insurance company that issues the annuity resets the rate from time to time, but guarantees it won’t drop below a specified minimum.
Keep in mind that withdrawals in the early years may be subject to surrender charges, and withdrawals before age 59½ may incur a 10 percent federal tax penalty.
At retirement, the deferred fixed annuity works in a manner similar to a personal pension — a source of regular income payments you can depend on to cover fixed or discretionary expenses. This guaranteed cash flow can continue for a specific number of years or for a lifetime. An annuity is the only personal financial product that offers an income that can’t be outlived. This benefit is especially appealing as longevity continues to increase.
Why the insurer's strength matters
The life insurance companies that offer deferred fixed annuities stand behind the interest rate and income guarantees. That means your retirement income plan is only as good as the financial strength of the annuity issuer. Third-party rating agencies like Standard & Poor’s and A.M. Best publish reports and ratings that are useful for assessing the financial strength of the issuing company. The due diligence you do today can pay off in having retirement income you can depend on. (Find MassMutual's rating here)
Economic turmoil and inflation can arise unexpectedly, ending a long bull market and pushing a healthy economy into a downturn. It can be a stinging reminder of how quickly the business environment can change, threatening earnings and profitability and invalidating financial projections. And it demonstrates the vulnerability of millions of small business owners whose thriving companies suddenly faced the risk of permanent closure and whose dreams of financial security went up in smoke.
Talk to Us
Building a retirement income plan that doesn't depend solely on a business sale can help you exit on your terms.
To that end, a deferred fixed annuity offers many benefits but is not the right choice for everyone. Be sure to talk to a MassMutual financial professional to determine whether the product is a good fit for your needs.
______________________________
Frequently Asked Questions about deferred fixed annuities
Q. What is a deferred fixed annuity?
A. A deferred fixed annuity is an insurance contract that credits your savings with a guaranteed interest rate during an accumulation period, then can convert those savings into a guaranteed stream of income for life or a set period. It offers tax-deferred growth with no direct stock market exposure. (Related: Different types of annuities explained)
Q. Why are deferred fixed annuities useful for business owners?
A. A business sale can't guarantee a predictable income stream, and retiring during a bear market can deplete equity savings. A deferred fixed annuity can provide guaranteed lifetime income that doesn't depend on market timing or a successful business exit.
Q. How does a deferred fixed annuity provide retirement income?
A. After the accumulation period, you can elect to receive income on a monthly, quarterly, semi-annual, or annual basis, for a specific number of years or for your lifetime. Because the payments are guaranteed by the issuing insurer, they can function much like a personal pension.
___________________
Discover more from MassMutual ...
Ways to increase the value of your business
The health hazards of being a boss
Prepared for a disability? Business overhead insurance
This article was originally published in August 2021. It has been updated.
________________________
