Start your retirement savings

Need to starting saving for retirementA Flexible Premium Fixed Differed Annuity or Traditional Annuity can be a great foundation to your retirement plan. This is about as simple as it gets, just like it sounds you receive a guaranteed fixed rate of return on the principal you contribute. The premium or savings you contribute is flexible, meaning you can “deposit” as much or a little, as frequently or infrequently as you like over time (within policy guidelines). Additionally, this type of annuity typically allows for a low initial investment a few even allow you to start with nothing.

The fixed rate helps establish a baseline that your retirement funds can’t fall below if you decide to add riskier investments to your retirement portfolio down the road. There are also many different tax advantages that will help your funds grow see our Tax advantages of Annuities section.

The “differed” part refers to when you want to enter the income phase of the policy. You get to determine when and how you want to receive the benefits. You have the option of surrendering the policy (cashing it out) and receiving 100% of your interest and principal as long as you have waited beyond the surrender penalty period (typically 5-10 years) see individual quote or policy brochure for details. You also have the option to annuitize or “turn on income payments” with this option you surrender the principal and interest in exchange for a larger sum of money paid out over time. The time frame can be a set number of years or for the rest of your life and can be as frequently as monthly.

NOTE: If you surrender or annuitize a policy before age 59 1/2 you will be subject to a 10% federal penalty.

Additional information to consider before starting your retirement plan

There are many options when it comes to starting your retirement savings. The biggest mistake most people make is skipping from a balanced budget to retirement savings. An example of this is when people find themselves with more income than expenses they think to themselves “I probably should starting saving for the future” They then take a part of their excess income and put it into long term retirement vehicles. This typically fails due to two reasons: first the “what if” or “emergency funds” are under funded or second their interest or desires change (they decide to buy a new home, a boat, or take a major vacation. If you can adopt a attitude that the first bill you have to pay is to your own future, than adjust your budget from there, many of the pitfalls can be avoided. As for the emergency funds financial professionals agree that you should have three to six months worth of income saved for the unknown. The unknown in your budget are things like unemployment, family illness, repair and replacement of essential items, and more.

The bottom line is the first step in starting your retirement savings is having sufficient personal emergency funds. Yes, this includes your company’s 401(k). It is tempting to take a short cut and start contributing to your company’s retirement plan especially when they are matching your contribution. It may sound counter-intuitive to say this but the reality is everyday people are forced to withdraw or loan from their 401(k) saving due to a lack of emergency funds. The problem with using your 401(k) for emergency funds is what the government considers an emergency and what you consider an emergency is usually quite different. In regards to a loan from the 401(k) that can just compound the problem you’re having. The repayment of the loan negatively affects your cash flow and can lead to more problems than you solve. Furthermore, many plans limit the number of loans you can have out so if you have a smaller emergency followed by a more costly one and you are limited to one loan you may be out of luck borrowing from it.

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