Are Annuities Right For You?

0
322
are annuities right for you

Determine If Annuities Are Right For You

pros and cons of annuitiesMost people have a financial goal or two. But everyone does not have the exact same financial goal. Sometimes we also have unique or different ways of achieving our goals. Some financial goals center around retirement saving. Other goals may focus on saving enough money to buy a new home or funding a child’s education. Some people buy stocks or bonds, others invest in mutual funds. Some folks feel safe investing in life insurance or annuities. And some investors are happy with bank certificates of deposit. Whatever investment type you choose for reaching your goal, just be sure to know what you are buying. Make sure you understand the features and benefits of the investment before you invest. Read the prospectus of the mutual fund, ask the broker questions on the stock or bond you are purchasing. Do your best to research as much as you possible can.

Getting To Know Annuities

Since a lot of investors are unfamiliar with annuities let’s look at their features and benefits. Annuities may or may not help you reach your goals but they may be worth checking out. Before you invest in any type of investment though, you need to determine what your personal financial goals are. Your goals may help you select the right investment. Start by asking yourself some key questions.

Are you concerned about your retirement income? Once you retire, will you have enough money or will you outlive your money? Do you need to supplement your retirement savings? If so, how can you do that? Will you need a guaranteed stream of income anytime soon? If so, do you have that need covered? What type of withdrawals will you need to make from your accounts? Does the fluctuation of the market make you nervous? Is your portfolio well-balanced? In other words, does your portfolio consist of a variety of investments such as stocks, bonds, mutual funds and life insurance. Do your investments cover long-term as well as short-term needs?

Annuities Come In All Shapes & Sizes

So many annuities to choose from; which to pick. Depending upon your financial goal you can choose a fixed or variable annuity and your contract can be a deferred or immediate. Even though there are different kinds of annuities, there is one common benefit that most investors appreciate the most. And that is the guaranteed stream of income that can be paid out for life.This guaranteed income feature is one of the reasons annuities remain a very popular investment.

Fixed Annuity Basics

  • a minimal exposure to market risks
    • principal and interest rates are guaranteed
  • withdrawals before a specific date, specified within the annuity contract, could be assessed fees
    • fees will vary per annuity company and product
  • a cost of living adjustment (COLA) feature can be added on
    • the COLA feature will adjust or counter your payouts for inflation
  • used to supplement retirement income

Variable Annuity Basics

  • variable annuities invest in “sub-accounts” which resemble mutual funds
    • sub-accounts expose variable annuities to market risks
  • market risk causes the principal and earnings to fluctuate with changing market conditions
    • when the market is up, the value of the variable annuity is up, similar to how a mutual fund would respond to the market
  • a “return-of-premium” death benefit is usually built into the contract
    • this feature pays your beneficiary at least the amount you originally invested if you should die before you start withdrawals
  • used to supplement retirement income

Deferred Annuity Basics

  • a deferred annuity contract defers your withdrawals and earnings until a later date of your choice
  • your earnings will grow tax deferred until you start withdrawals
  • at withdrawal, the earnings are taxed as ordinary income
  • fixed or variable annuities can be purchased as a deferred annuity
  • used to supplement retirement income

Immediate or Income Annuity Basics

  • immediate and income annuities mean the same thing
  • your payouts begin right away or immediately with an immediate annuity contract
  • once you put money into an immediate or income annuity you lose access to the principal
  • the annuity company is guaranteeing you a stream of lifetime income and they cannot do that if you have access to the principal
  • fixed or variable annuities can be purchased as an immediate annuity
  • used to supplement retirement income

Your Financial Tool Box

As an investor, you need a diverse financial tool box. The incorrect financial move would be to put all of your eggs in one basket. If your portfolio is made up of only stocks, you will be off-balance if the market dips. The same is true of bonds. If the market shifts, your asset value also shifts. Placing all of your money into annuities can be risky. Spreading your assets over a broad selection of investment types is a wise move because it provides you with more of a balance. Whether you choose to include annuities in your selection is a personal choice. Annuities can be of great value to you when used properly. They can charge higher fees than most investments, but they also offer a benefit that other investments do not offer….a guaranteed lifetime steady stream of income.

Annuities are not for everyone due to various reasons. But do your own research, ask your own questions, get to know annuities. You may be surprised about what you learn. They may be perfect for the financial goals you have set for yourself and then again, they may not be. Before you dismiss annuities as a viable investment choice, learn more about them.

 

 

 

LEAVE A REPLY

Please enter your comment!
Please enter your name here