What are Annuities?
An annuity is a financial product that can provide individuals with a reliable source of income via regular payments in exchange for a lump sum investment or a series of payments over time. Basically, it’s a prearranged legal agreement between an individual and an insurance company, providing scheduled payments for specified period or for the rest of the individual's life.
By investing in an annuity, individuals can guarantee themselves a reliable income stream that can supplement other retirement savings, such as Social Security benefits or pension plans. When an individual buys an annuity, customers can choose to receive payments immediately or defer them to a later date, depending on their financial goals and circumstances.
Types of Annuities
There are a few distinct types of annuities, each designed to address specific needs and preferences. Let's break down the most popular categories:
- Fixed annuities provide a consistent income stream because insurance company commits to a locked-in interest rate for a specified period of time. The insurance company assumes any and all investment risk, meaning that even if the market experiences fluctuations, the individual's income remains unaffected.
This type of annuity offers dependability and security, making it the perfect option for those who prefer predictable payments.
- Variable annuities allow customers to invest their money in a wide variety of investment options like stocks, bonds, or mutual funds. The success of these investments determine the annuity's performance and profitability.
While variable annuities offer opportunities for greater returns, they also present increased risk. The value of the annuity can increase or decrease based on the performance of the attached investments, making it a better choice for customers comfortable with market volatility.
- Indexed annuities are somewhat of a hybrid between fixed and variable annuities. The returns on indexed annuities are tied to a specific market index, such as the S&P 500. In other words, customers can benefit from market growth while still having a guaranteed minimum return, making them a popular option for individuals who still want to participate in the market's upside while avoiding major risk.
- Immediate annuities offer customers the opportunity to begin receiving payments immediately after making a lump sum investment. This type of annuity is ideal for those who need income without the wait, such as newly-retired folks.
Immediate annuities provide an immediate income stream that can help cover living expenses, healthcare costs, or other financial obligations individuals may have during retirement.
- Deferred annuities are the oppositive of immediate annuities, allowing customers to delay their payments to a later date. By investing in a deferred annuity, folks can accumulate more funds over time, possibly benefitting from compound interest and tax-deferred growth.
This type of annuity is great for individuals who are planning for their retirement in the distant future with no immediate need to receive their payments.
Each type of annuity has its own unique benefits and drawbacks. Individuals who are considering any of these options should carefully consider their financial goals and consult with a financial advisor before making any final decisions.
Should I Invest in an Annuity?
An annuity will provide you with dependable payments for a specific period of time or even for the rest of your life. This can provide powerful peace of mind and financial stability, especially if you don't have a pension or other reliable sources of income to fall back on.
Annuities offer a genuine sense of security, allowing you to confidently plan for your future. The guaranteed income from annuities can offer you the financial freedom to enjoy your retirement without financial stress.
Tax Deferral Benefits
When you invest in an annuity, your earnings are allowed to grow tax-free until you decide to withdraw them. This can be advantageous if you're looking to maximize your retirement savings, reduce your tax liability, and allow your investment to grow at a faster rate.
As an added bonus, if you expect to be in a lower tax bracket during retirement, you may be able to withdraw your annuity funds at a lower tax rate, increasing your tax savings even more.
Protection from Market Volatility
Certain types of annuities, such as fixed annuities, safeguard your principal and earnings against unpredictable market fluctuations. This ensures that you won't lose money due to economic downturns. This stability can help you maintain you stay on track with financial goals, even if the stock market is experiencing significant volatility.
Some types of annuities can even protect you from inflation by offering features that can help your income keep up with rising costs of living. This ensures that your standard of living is maintained, even if the cost of goods and services increases.
Fees and Charges
Annuity contracts often include a variety of extra costs for administrative fees, mortality fees, and more. These fees can cut into your investment returns over time, so it's important to carefully consider these costs before signing on the dotted line.
Lack of Liquidity
Once you invest your money in an annuity, it's usually tied up for a good while. Withdrawing funds before the designated surrender period ends can result in penalties and fees. This lack of liquidity can limit your financial flexibility in a major way, so it's essential for you to determine your future cash needs before committing.
Annuities can be complicated financial products that are often challenging to fully understand. The wide variety of annuity types and options can be confusing for experts and newbies alike, so be sure to carefully research and seek professional advice before making an informed decision to move ahead.
Factors to Consider Before Investing in Annuities
Your Financial Goals
Before leaping into annuities, you should definitely assess your financial goals. Annuities can be an excellent method of providing yourself with a steady income stream. However, if your objective is to grow your wealth or have more flexibility, other investment options may be better choices for you.
Your Risk Tolerance
Are you comfortable with taking financial risks? If you're someone who prefers low-risk investments with guaranteed returns, annuities may be your jam. Conversely if you are more interested in taking chances that could potentially yield greater rewards, higher-risk options might be more appealing.
Your Retirement Plan
For many, annuities are just one piece of a larger puzzle that illustrates your future financial outlook. It's important to strike a strong balance between annuities and other investment options to create a diversified and robust retirement portfolio, so be sure to map out a comprehensive game plan with a qualified financial expert.
The Bottom Line
Like all financial solutions, annuities are fantastic… for some of us. If you are considering your current or future investment options, we recommend that you do your research, figure out your overall financial gameplan (especially for your retirement years) and take a deep dive with a financial professional to determine whether an annuity of any kind is the best fit for you.
If you already have an annuity and feel like it is no longer the best choice to help you achieve your financial goals, JG Wentworth can help! We’ve assisted plenty of customers over the years by purchasing their annuities for lump-sum payments that are more aligned to their needs. Give us a call at 855-688-9669 and let’s discuss how we can help!