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Assets &
Annuities > Annuities Information
Annuities are unique savings vehicles
simply because the interest earned is tax-deferred. That means
you do not pay tax on your interest until you draw it out, and
you only pay tax on the specific amount you take.
Most retired persons have money in bank
certificates of deposits (CDs). You must pay tax on interest
earned every year, whether you draw it out or not. This lowers
your yield since you are not earning interest on interest
because of taxes.
In addition to the tax advantage, annuities
generally offer higher interest rates than CDs. Let me give
you an example of how an annuity can provide the security
you need in retirement.
For the purposes of this illustration,
we will use: a married couple in a 25% tax bracket, with life
savings of $100,000.
In a CD yielding 5%, annual income $
5,000
In an Annuity yielding 7% annually 7,000
Let’s say they need $3,000 per year to
cover premiums for a long-term care policy and a life insurance
policy.
|
Using income from a CD |
| CD earned |
$ 5,000 |
| Less taxes paid |
-1,250 |
| Net annual income |
3,750 |
| Less premiums |
-3,000 |
| Balance reinvested |
$ 750 |
|
Using income from an Annuity |
| Annuity earned |
$ 7,000 |
| Less premiums |
- 3,000 |
| Less taxes paid on
amount withdrawn |
- 750 |
| Balance reinvested |
$ 3,250 |
You would have $2,500 more the first
year just by switching from a CD to an annuity! Withdrawal
is penalty free if nursing home care is needed.
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