Annuities can be a great way to save for retirement, but there are a few key things you need to know before you invest in one. This blog post will discuss the most important things you need to know about annuities. It will cover topics such as how annuities work, the different types of annuities available, and the pros and cons of investing in them. By the end of this post, you should have a good understanding of what annuities are and whether or not they are right for you.
How annuities work
One of the key things that you need to understand about annuities is how they work. An annuity is a contract between you and an insurance company. You agree to make regular payments into the annuity, and in exchange, the insurance company agrees to make periodic payments to you. The payments can be made either for a set period or your lifetime. The financial advisers behind The Annuity Expert Advice recommend that before you purchase an annuity, you consult with a tax professional to see how it will fit into your overall financial picture. More often than not, annuities are purchased with retirement savings but they are not necessarily just for retirement.
Different types of annuities
- Fixed annuities
Fixed annuities offer a guaranteed rate of return, which means that you will know exactly how much money you will receive each month. In this case, the insurance company takes on all of the investment risks, which can be a good option for people who are risk-averse because it provides a guaranteed stream of income. You can expect to receive a higher rate of return with a fixed annuity than you would with a savings account at a bank, but it is important to note that the payments are not guaranteed to keep up with inflation.
- Variable annuities
With a variable annuity, your payments will fluctuate depending on how the underlying investments perform. This means that there is some investment risk involved, but it also offers the potential for higher returns. Variable annuities are often used as a way to invest in the stock market without having to directly own stocks. Usually, the people who purchase variable annuities are comfortable with taking on some investment risk in exchange for the potential of higher returns.
Benefits of investing in an annuity
- Source of income
One of the biggest benefits of investing in an annuity is that it can provide a source of income that you cannot outlive. This is because annuities often offer lifetime payments, which means that as long as you live, you will continue to receive payments. For example, if you purchase a lifetime annuity at age 65, you will continue to receive payments even if you live to be 100 years old. This can provide peace of mind for retirees who are worried about outliving their savings.
- Guaranteed income as well
Another benefit of annuities is that they offer a guaranteed stream of income. This is because the payments are made by an insurance company, which is required by law to have enough money set aside to make all of the guaranteed payments. This means that you can count on receiving your annuity payments even if the markets crash or the economy takes a turn for the worse. Just keep in mind that the payments are not always guaranteed to keep up with inflation.
- Income for your beneficiaries
Annuities can also provide income for your beneficiaries after you die. This is because many annuities offer death benefits, which are payments that are made to your beneficiaries when you die. The death benefit can be used to help your beneficiaries cover expenses or to help them meet their financial goals. It can also be used to help pay for your funeral and final expenses when you go. Some people even use annuities as a way to leave a financial legacy for their beneficiaries.
- Portfolio diversification
Finally, an annuity can be a great way to diversify your investment portfolio. This is because annuities are not directly tied to the stock market, which means that they can provide a measure of stability during times of market volatility. For example, if the stock market crashes, your annuity payments will not be affected. This can help to protect your portfolio from losses and give you peace of mind knowing that you have a stable source of income.
Drawbacks of investing in an annuity
- Difficult to get your money out early
One of the biggest drawbacks of investing in an annuity is that it can be difficult to get your money out early. This is because most annuities have what is called a surrender charge, which is a fee that you will have to pay if you withdraw your money early. The surrender charge can be as high as 20%, which means that if you invest $100,000 in an annuity, you could be charged a $20,000 fee if you withdraw your money within the first few years. This is one of the reasons why it is important to make sure that you are comfortable with the terms of your annuity before you invest. You should also make sure that you have a clear understanding of the surrender charges and how they work.
- Payments are not guaranteed to keep up with inflation
Another drawback of annuities is that the payments are not always guaranteed to keep up with inflation. This means that the purchasing power of your payments can decline over time, which can put a strain on your budget. For example, if you receive an annuity payment of $100 per month, that payment will only be worth $95.24 in 20 years if inflation is at its historical average of about three percent. This is why it is important to find inflation hedges when you are planning for retirement.
Purchasing an annuity is a big decision and it is important to do your research before making a purchase. This blog post has provided a brief overview of some of the things you need to know about annuities. If you are considering purchasing an annuity, be sure to talk to a financial advisor to get more information and to see if an annuity is right for you.