Deciding whether annuities are a smart financial decision comes down to where you are in your retirement journey. For example, fixed annuities are secure financial products and should be a consideration for anyone looking to maximize their retirement portfolio. However, variable annuities feature fluctuating returns and introduce more risk exposure. Using this example, you can see how choosing an annuity comes down to various financial preferences.
But before we dive into specifics, you might be wondering what annuities are. Technically, annuities are insurance contracts issued by insurance companies and offered through their contracted and licensed agents. Annuities can be purchased with either monthly premiums or lump sum payments and used either to accumulate funds on a tax-deferred basis or to pay out guaranteed income over a fixed period or for a lifetime. In this article, we delve into the different types of annuities and guide you through which ones can work best for your financial goals. We also compare annuities with some alternative financial strategies for retirement.
AnnuityAdvantage is here for all of your annuity needs. We guide you to the fixed-rate annuities (MYGA), fixed indexed annuities (FIA), and income annuities that make the most sense for your risk tolerance and individual needs. You should never worry about outliving your savings. Take care of your family while enjoying your golden years with AnnuityAdvantage.
Annuities describe a category of financial products purchased from insurance companies. They can be funded either through a lump sum deposit or through a series of regular payments. There are many types of annuities and all of them are designed to address different goals, such as growing your money on a tax advantaged basis, producing immediate income, or guaranteeing your future income. Unlike 401k(s) or non-annuity IRAs, annuities are the only financial instrument that can provide a fixed stream of income guaranteed for the rest of your life. This is why they can be an excellent consideration for part of your retirement planning strategy.
There are many benefits to annuities. With fixed annuities, these benefits come from the annuity’s contractual guarantees and by providing security in the form of principal protection.
The following is a partial list of fixed annuity benefits:
There are several different categories and types of annuities, and choosing which type works best for you depends on your own personal situation.
Deferred annuities describes a category of annuities for those who don’t currently need income. There are many different types of annuities that fall under this category, including fixed-rate or multi-year guarantee annuities and fixed indexed annuities. These annuities grow your money tax-deferred until you need access to your funds. This category of annuity uses an accumulation phase (your money accumulates) and an annuitization phase (you begin receiving income). An interesting fact is that the majority of deferred annuities are never annuitized by their owners.
For those who need immediate retirement income, immediate annuities are one of the best options. Immediate annuities give you flexible payout options and help provide peace of mind. This type of annuity benefits those who need monthly income to supplement their social security or pension.
Immediate annuities also benefit those who need additional income to help cover healthcare, utilities, and other retirement expenses. There is no accumulation phase with immediate annuities. You pay a lump sum and automatically enter the annuitization phase, with income payments beginning within one year of contract issue.
Deferred and immediate annuities can be issued as either fixed or variable contracts. The primary difference to keep in mind is that with a fixed annuity, your principal is guaranteed by the issuing insurance company, and with variable annuities, your principal is at risk and subject to potential market losses. Fixed annuities are the more secure type of annuity, offering strong contractual guarantees and insulation from market downturns.
Fixed index annuities (FIAs) deliver a healthy middle ground between fixed-rate annuities and variable annuities, providing a balanced approach to both risk aversion and growth potential.
Fixed-rate annuities, also called multi-year guarantee annuities (MYGA), are the most straight-forward and easiest to understand of the annuity types. They feature set fixed interest rates that are guaranteed for specific periods of time. The guarantee period for these annuities is typically 2-10 years and the annuity grows at a steady, predictable rate, ensuring a guaranteed rate of return.
Fixed index annuities (FIAs) determine your annuity’s interest rate by measuring the performance of the stock market index(es) that it is aligned with, and then applying the percentage gain in that index as an interest credit. If the index decreases that year, you receive zero interest, but your principal is still protected and secure. Usually, the upside potential is limited in some way by a participation rate percentage or cap. When the market index your annuity is aligned with performs better, your annuity performs better.
With variable annuities, you invest your annuity funds in certain investment options (typically mutual fund type sub-accounts) and the performance of these sub-accounts determine your earnings. Variable annuities do not guarantee your investment’s performance and they come with significant risks that investors should take into account. They can be attractive if the current fixed annuity rates are unfavorable and you’re willing to expose your principal to potential market losses. One common complaint of variable annuities is their high fees.
Planning for retirement requires the consideration of many financial options and choices. Of those options, fixed-rate annuities and fixed index annuities are among the safest options. They have reasonable upsides, tax-deferred growth, and guaranteed lifetime income options that can help you feel safer with your retirement investments.
You’ve likely heard of diversification when speaking about having a well-rounded retirement portfolio. The following are examples of the most common investment options that you can use to diversify your retirement portfolio.
Certificates of Deposits (CDs) are sold by banks and they offer fixed interest rates for periods of time from which you can choose. These periods are typically six months to five years. When analyzing annuities vs. CDs’ benefits, it’s important to recognize that CDs typically pay higher interest than savings accounts and they are insured by the FDIC. As with annuities, certificates of deposits have penalties for withdrawing your money before the end of their specified term. However, unlike tax-deferred annuities, CDs’ interest earned gets taxed each year, even if you don’t withdraw it. Their interest rates are also usually significantly lower than what you stand to earn from a fixed-rate annuity of the same duration.
Stock mutual funds let you invest in a portfolio of stocks without taking on the risk of investing in just one stock individually. Investors typically pick a mutual fund family and then choose from various options in an attempt to maximize their investment growth. However, unlike fixed annuities, stock mutual funds expose your investment to potential market losses and do not have a minimum guaranteed interest rate. They can also charge both upfront and ongoing annual fees, whereas fixed annuities do not.
Stocks can fit in a well-balanced retirement portfolio due to their high potential for growth. However, stocks require a substantial amount of research and analysis and include risks not associated with fixed annuities. Fixed annuities offer the benefit of securing your principal while stocks don’t. Like stock mutual funds, individual stocks also don’t offer any minimum interest rate guarantees.
Fixed annuities offer a safer option for those looking for financial stability and an easier way to invest their money as part of their retirement portfolio. With their guaranteed interest rates, income options and principal protection, fixed annuities allow you to earn a reasonable return while protecting yourself from stock market fluctuations.
Fixed annuities also contain fewer stipulations than variable annuities and they are easier to understand. They are sensible products for anyone seeking assurance that their money will accrue interest over time without dealing with the potential ramifications of market volatility. They simplify income planning and ensure you understand the exact amount of payouts that are contractually guaranteed over the course of the annuity, allowing you to plan your future with more accuracy.
Annuities can be an excellent choice for part of your retirement portfolio and they can help you create a solid income plan as you prepare for the future. As we have discussed, there are many different types of annuities so it is important to understand their distinctions when deciding which annuities are the right fit for your retirement plan.
For example, if you are comparing fixed-rate (MYGA), fixed-indexed, and variable annuities, it’s important to note that fixed-rate and fixed-index annuities offer more predictable growth opportunities while mitigating the risk associated with variable annuities. You should also consider whether you’re purchasing an annuity for its tax-deferral benefits or guaranteed income. If you need immediate retirement income, an immediate annuity is preferable. If you are looking for the tax deferral benefits annuities can provide, a deferred annuity is likely your best choice.
At AnnuityAdvantage, we guide you through the annuity buying process and help to ensure your chosen annuity is suitable and stands to bring you the best results over time. Contact us today to discover which annuities fit your situation best and start enjoying retirement the right way: with a clear path to future financial success.
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