10.6 Ordinary Annuities, Sinking Funds, and Retirement Investments 647 Other Annuities and Retirement Savings Options Thus far we have discussed ordinary annuities and sinking funds. Next, we will briefly discuss variable annuities, immediate annuities, and other types of retirement savings options. A variable annuity is an annuity that is invested in stocks, bonds, mutual funds (see the Did You Know? boxes on pages 642, 644, and 645, respectively) or other investments that do not provide a guaranteed interest rate. The term variable is used because the value of the annuity will vary depending on the performance of the investment options chosen by the investor. Like an ordinary annuity, an investor usually invests in a variable annuity by making regular periodic payments. Unlike an ordinary annuity, however, a variable annuity does not have a fixed rate of interest. Most variable annuities are investments made to save for retirement. An immediate annuity is an annuity that is established with a lump sum of money for the purpose of providing the investor with regular, usually monthly, payments for the rest of the investor’s life. In exchange for giving the investment company a lump sum of money, the investor is guaranteed to receive a monthly income for the duration of the investor’s life. A deferred income annuity, or deferred annuity, provides you or your spouse with a guaranteed income for life. A deferred annuity commences only after a lapse of some specific time after the final purchase premium on the policy has been made. This type of annuity has two phases: the saving phase, which is when the account holder invests money into the account, and an income phase, which is when the plan is converted into an annuity and begins paying the account owner. Deferred annuities can be variable or fixed. Deferred annuities are often part of a retirement plan. Annuities can be used to save for retirement, but depending on the investor’s circumstances, other investment options for retirement savings may be more advantageous. Individual retirement accounts, also known as IRAs, are accounts in which individuals may invest up to a certain amount of money each year for the purpose of saving for retirement. IRAs have distinct tax advantages over non-IRA accounts. There are several different kinds of IRAs, but most can be classified as either a traditional IRA or a Roth IRA. A traditional IRA is an IRA into which pretax money is invested, meaning that any money invested into a traditional IRA is not subject to income taxes. However, when money is withdrawn from a traditional IRA, the money is subject to income taxes. A Roth IRA is an IRA into which post-tax money is invested, meaning that the investor has already paid income taxes on the money invested. When money is withdrawn from a Roth IRA after the investor reaches retirement age, the money is not subject to income taxes. A 401k plan is a retirement savings plan in which employees of private companies can make contributions of pre–income tax dollars that are then pooled with other employees’ money. These funds are then invested in a variety of stocks, bonds, money markets, and mutual funds. Although 401k plans share many of the same tax advantages as IRAs, they also have several distinct advantages. First, employees are generally allowed to invest more money annually in a 401k plan than in an IRA. A second advantage is that some employers will match employee contributions up to a certain limit. A Roth 401k plan is a retirement savings plan that differs from a 401k plan Microsoft Excel Read the Technology Tip pages 644–645 and follow a similar procedure using the variables A r n t , , , ,and, p, respectively. To evaluate the sinking fund payment, in cell E2 enter the formula = + − A2 * (B2/C2)/((1 B2/C2) ^ (C2 * D2) 1) After the Enter Key is pressed, the answer 387.4844207 is displayed in cell E2. m It is never too early to start saving for retirement. Wavebreakmedia/ Shutterstock
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