Annuities are a method of saving for retirement that have been growing in popularity of late.
Statistics from the Bank Insurance & Securities Research Associates show that sales of indexed annuities in the second quarter of last year were two thirds higher than the year before.
Annuities often get bad press, being seen as complicated and inflexible, but in actual fact annuities have a lot to offer for savers.
Is an annuity right for you and how can you go about choosing one?
How Annuities Help You Save For Retirement
An annuity allows you to save money now to be paid back in the future.
You make investments in your annuity tax-free, although you may have to pay tax on the money when you begin receiving it at a later date. You can opt to receive the money monthly, quarterly, annually, or as a lump sum.
Annuities can provide good protection against the risk of running out of money when it’s time to retire. If you’re deciding whether to buy an annuity, it helps to understand the choices you have.
Different Annuities Explained
There are three different types of annuity:
• A fixed annuity guarantees you’ll make a specific interest rate on your money. Fixed annuities can be either immediate or deferred. An immediate annuity means you’ll make a one-time payment followed by a fairly quick payout, while a deferred annuity means you’ll save for longer before payments start;
• A variable annuity means you make payments into a variety of mutual funds, which may also encompass money markets and international funds. The amount you accumulate in your annuity account depends on how well the mutual funds perform;
• An indexed annuity is tied to a financial index. Indexed annuities typically come with a guaranteed minimum return; with the exact amount you receive back being dependent on the performance of the index.
Pros and Cons of Annuities
Annuities come with their own unique set of pros and cons.
On the plus side, certain types of annuity can offer a fixed return, making them risk free or low risk. They protect your income from tax while it’s in the annuity, meaning more of your money can work for you for longer.
On the negative side, annuities don’t offer a lot of flexibility, and both initial fees during set up and surrender fees if you need to draw on them early can be higher than with other retirement products.
Annuities can provide you with a steady retirement income.
The key to making annuities work for you is asking the right questions and making sure you choose the one that best fits your circumstances.
Things to Consider When Buying Annuities
As the following articles show, if you’re considering buying annuities, you can make the process easier by asking yourself some questions.
Think about what you need the annuity for and when you need it.
If you’re near retirement age and need a guaranteed income quickly, an immediate fixed annuity would be a good choice. If you’re not retiring for a few years yet and have time to build up the money, a deferred, variable or indexed annuity might be a better choice.
Consider when you will need the money – with proper planning you can avoid the risk of surrender fees for early withdrawal
If you want to leave the annuity as an inheritance, consider an indexed annuity with a “death benefit” which guarantees a fixed payment to your beneficiaries even if the value of your annuity has dropped.
It’s also important that you ask your insurance company about set up and surrender fees, your guaranteed minimum payment, and whether you can use a waiver to access your money without paying surrender fees in an emergency.
Choosing annuities can seem complicated, but with careful planning and by asking the right questions you can cut through the confusion and make an informed investment choice that is right for your future.
About the Author: Tristan Anwyn writes on a wide variety of topics, including social media, SEO, annuities and retirement planning.