As you near retirement age, your portfolio should begin to exhibit a good bit of diversity. Sometimes, that makes it necessary to look further afield for products that meet your investment needs. Often, that search will lead you to annuities. Annuities are insurance products that allow you to take a chunk of your retirement savings and entrust it to an insurance company to grow at a fixed or variable rate (depending on the product you choose) in return for regular income payments for the rest of your life.
The insurance side of this arrangement entitles your beneficiaries to the better of either the minimum benefit or the value of your annuity at the time of your death. When you begin researching annuities online you’ll find that one of the most commonly used phrases about them is, “Annuities aren’t for everyone.” While no investment product is perfect for every portfolio, annuities take this to another level.
The first challenge with annuities is that you can’t start drawing the money out, without an IRS penalty, until you’re 59 ½, and even then, you’ll pay early surrender charges for exceeding the penalty free withdrawal provisions unless a specified time period has elapsed since the beginning of the contract (usually 3 to 10 years). Another problem with annuities is that the interest you receive is taxed at ordinary income rates, not those that govern capital gains.
The benefit of an annuity lies in its tax deferral properties, but there are simpler and cheaper ways to obtain that benefit, namely IRA’s and 401K’s. If you aren’t using these products to their fullest extent then stop and figure out how you can. When you’ve maxed out those contributions it will be time to return to the question of annuities.
Your first step will be deciding exactly what kind of annuity you need. There are three basic types to choose from:
Fixed Annuities:
Fixed annuities lock in a rate of return for a specified period. The rates of return that you experience will fluctuate, but you’ll be guaranteed a minimum, so if the market tanks it won’t take your annuity with it. The cost of this safety is that you won’t experience the gains from a surging market that you could with traditional stocks.
Variable Annuities:
Variable rate annuities invest your money in accounts similar to mutual funds, and they incur all of the risks and rewards inherit in that arrangement. You can ride them to the moon in a market surge, or watch it all slip away during a crash.
Equity Indexed Annuities:
Equity indexed annuities offer up a mix of the benefits of the other two. They guarantee a rate and a minimum amount for payments, but they allow more opportunity for growth because they are tied to an index, like the S&P 500.
These products are offered by a wide variety of insurers, and the fees and penalties vary just as widely. The key to getting the right annuity for your situation is finding a knowledgeable financial planner or insurance agent who understands them, and working with him/her to ensure you find the best one for you. Making the right decisions with your money means understanding what you are investing in. Annuities can be complicated, so there is no shame in asking questions, including the amount and purpose of the various fees that go along with this type of investment.
Annuities are an innovative and useful investment tool if used in the right way, but once the money is committed it can be expensive to change your mind, so do your homework, find a financial planner you can trust, and grow your retirement in good health.
Need more answers on annuities? Get the experts at AnnuityAdvantage to help you with all your questions! Contact us today at 1-800-239-0356, email AnnuityAdvantage at [email protected], or go to https://www.annuityadvantage.com/.
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