Annuities are long-term contracts between a purchaser and an insurance company. These financial products are designed specifically for retirement purposes and the purchaser makes a lump sum payment or a series of contributions spread out over time.
The insurer is then obligated to make periodic payments to the annuitant at a future specified date.
There are several types of annuities, including fixed annuities, fixed index annuities, and variable annuities. All of these financial products have benefits that you should understand prior to choosing an annuity product. In this article, we’re describing the benefits of all these annuities and how you can fit them into your retirement plan.
What are Annuities Used for?
The goal of annuities is typically to provide a steady stream of income for retirement. Your funds will accrue on a tax-deferred basis and can only be withdrawn without penalty after age 50 ½. Annuities can be tailored to the specific needs of the buyer and in addition to choosing between a lump sum payment and a series of payments, you can also choose when you want to annuitize your contributions.
Annuities that begin paying immediately are referred to as immediate annuities. An annuity that starts at a predetermined date in the future are known as deferred annuities. The timeframe for your disbursements can also vary. You can choose to receive your payments over 25 years, for example, or the rest of your life. Securing a lifetime of payments can lower the amount of each of your checks, but it will provide stability so you don’t outlive your assets.
Annuities are used mainly to supplement more traditional sources of retirement income such as your 401(k). Generally, there are no limitations on the contributions you make into annuities, regardless of your income or success level. Annuities also offer you a concrete rate of return, unlike stocks, bonds, and the money bought from market instruments.
You also don’t have to worry about mandatory withdrawal annuities. If your annuity is not part of an IRA or a qualified retirement plan, you will not be required to take minimum distributions after the age of 72. Annuities also feature death benefits that guarantee the payment to your designated beneficiary in the event that you pass away. Lastly, annuities feature lifetime income benefits that give you several options for annuity payments for the rest of your life.
Living Benefit Options
Living benefit options introduce an interesting characteristic to annuities. The principal characteristic of annuities is a stream of income that cannot be outlived. However, for an additional fee, you can buy optional principal protection benefits. These fees are referred to as living benefits and they offer exposure to the market’s upside while protecting against market effects on your account.
Balance Costs and Benefits
Owning an annuity can entail higher fees and expenses than other investment vehicles. These fees can include insuring the death benefit, living benefits, and other guarantees. You should also look at annual contract charges and surrender charges the issuing insurance company may impose on your withdrawals during the initial years.
You can refer to your contract’s prospectus for detailed information about how withdrawals affect your annuity’s death benefit and financial professionals can explain the way you will need to tailor annuities to your specific needs.
Types of Annuities
Fixed annuities describe an annuity type that pays out a guaranteed amount. This type of annuity comes in both fixed immediate annuities and fixed deferred annuities. Immediate annuities pay you immediately and deferred annuities
Fixed annuities pay out guaranteed amounts to those who buy them and they come in two different styles. Fixed immediate annuities pay a fixed rate immediately and fixed deferred annuities pay you later. In exchange for the predictability, you receive from fixed annuities comes at the cost of a minimal return. Though these annuities are generally higher than CDs, variable annuities offer a higher chance for return.
Variable annuities give purchasers more opportunity for higher returns at the cost of greater risk. With variable annuities, you pick from a menu of mutual funds that enter into a sub-account. Your payments will be based on the performance of the investments in the sub-account.
Indexed annuities strike a middle ground between fixed and variable annuities. They offer some benefits for both risk and reward compared to fixed and variable annuities. With these annuities, you receive a guaranteed minimum payout, although a portion of your return is tied to the performance of a market index.
Despite the room for potential earnings, many professionals criticize indexed and variable annuities because of their complexity and the fees associated with them. For example, annuitants have to pay fees
Are Annuities a Good Investment?
Annuities are good investments for anyone looking to generate income as opposed to capital appreciation. Because of this, annuities are best-suited for those who want to add income later in life or those who wish to convert a large lump sum into a guaranteed stream of cash flow over time.
Can You Lose Money in an Annuity?
If you die before an annuity has been paid out, you might receive less than what you initially put into the annuity. Survivorship annuities and those that let you pass your value to beneficiaries can help you avoid this issue. You can also lose money in an inflationary period if the fixed annuity’s payments are not indexed to the CPI.
Conclusion- What Are the Benefits of Annuities?
If you’re looking for a way to boost your retirement savings or generate a lifelong income, annuities can be an excellent choice. There are also tax deferral benefits associated with annuities that you should consider. However, when it comes to annuities, however, you should be certain the one you purchase fits your retirement goals and financial preferences.
Annuities can be complex and having a certified professional walk you through which ones make the most sense for your retirement plan is the best course of action to ensure your annuity plan works for your financial situation.