Are Annuities A Good Choice For Retirement?
Whether you are nearing retirement or simply getting an early start on retirement planning, having a good idea of what retirement investment vehicles are out there goes a long way when trying to set aside income for retirement. One option that offers guaranteed income and safety of principle is an annuity. Basically, annuities are an insurance product that give you guaranteed payments for a specific time frame based on the contract. They offer many pros including tax-deferred growth, no annual contribution limit, and a steady stream of guaranteed income during retirement. They also have some cons associated with them including strict withdrawal penalties, no death benefits, and taxable payments. However, if safety of principle and guaranteed income is one of your primary goals in retirement, then annuity is worth giving some careful consideration to.
How Does An Annuity Work?
When you purchase an annuity you will sign a contract with an insurance company that guarantees you payments for a specific time frame. Ie; from age 65 until death. An annuity works exactly opposite of life insurance. Life insurance will pay when a person dies, an annuity pays up until that person dies. Annuities can be paid for in one lump sum or they can be paid for over time. The annuity can either be immediate or deferred, meaning at the time of purchase you can determine whether or not you want payments to begin immediately or if you would prefer they defer until a certain point in time during your retirement.
What Type Of Annuity Should I Consider For Retirement?
When selecting the right annuity for your retirement, it’s important to have a firm grasp of the differences between the available annuities. There are three common types of annuities including: Fixed, Indexed and Variable.
Fixed annuities: With a fixed annuity the interest rate is guaranteed while the account accrues. These have the least risk associated because the interest rate never changes and the principal is guaranteed.
Indexed Annuities: With an indexed annuity, the interest rate is based on a percentage of a particular index’s growth. There is a determined participation rate, meaning if the annuity has a participation rate of 70% and the S&P 500 experiences 10% growth, the annuity is credited only 7% growth. This is riskier than a fixed annuity but much less risky than full-fledged stock market participation.
Variable Annuities: This type of investment ranges from conservative to aggressive, depending on your risk appetite. With a variable annuity the account value is in constant fluctuation depending on the performance of the markets and the subaccounts chosen.
How To Select The Right Annuity For My Retirement?
Because there are so many available options when considering an annuity, it is extremely important that you have vast knowledge base regarding the type of annuity that will best suit your investment needs. Additionally, a great deal of research must be done on the company you are purchasing the annuity from to ensure they will be around for the long-haul. For more information on annuities and their benefits during retirement, speak to a Redhawk Wealth Advisor near you today.