Annuities HQ https://www.annuitieshq.com Mon, 29 Jan 2018 18:29:09 +0000 en-CA hourly 1 Building A Portfolio: What Are The Best Investments for Retirement? https://www.annuitieshq.com/articles/building-a-portfolio-what-are-the-best-investments-for-retirement/ Wed, 01 Nov 2017 16:12:43 +0000 https://www.annuitieshq.com/?p=26171 Individuals who are saving for their retirement are mostly concerned with one thing – am I putting my money into the right investments? Unlike other investor types, those building their retirement portfolios are mostly concerned with safe growth; maybe their portfolio won’t grow as fast as it potentially could, but they also won’t have to […]

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Individuals who are saving for their retirement are mostly concerned with one thing – am I putting my money into the right investments?

Unlike other investor types, those building their retirement portfolios are mostly concerned with safe growth; maybe their portfolio won’t grow as fast as it potentially could, but they also won’t have to worry about the risk of losing their investment in a market crash.

Proper retirement investments offer both of these qualities – predictable growth and safety. With a lesser potential for risk, these investments allow individuals to build their nest egg securely, while ensuring an income after they retire. Want to make sure you are putting your money in the right investment vehicles for your retirement? In the following post, we will explore several different retirement investment options and explain how each could potentially benefit your portfolio.

401(k) Plans

One of the most popular investment vehicles for retirement savings is a 401(k). Basically, a 401(k) is a savings plan offered by an employer that allows employees to invest a portion of each of their paychecks – before taxes are deducted. 401(k) plans are typically made up of several mutual funds (see below), and gives the investor a choice of what funds to invest in.

With a 401(k) plan, the employee decides what portion of their income they want to contribute. The employer deducts this amount from each paycheck and deposits it into the employee’s account, on their behalf. In most cases, companies hire third parties such as mutual fund companies, brokerage firms, or insurance companies to manage and administer the plan. 401(k) plans allow employees to invest easily and without much effort, since funds are automatically deducted from their paycheck before they ever receive it.

 

Pros of a 401(k) plan

Easy Management: 401(k) investments are simple to start, and easy to manage. Since investment funds are automatically withdrawn from their paycheck, employees don’t have to worry about manually investing funds.
Pre-Tax Contribution: Contributions to 401(k) plans are made before taxes are taken out of an individual’s paycheck. Since the percentage is taken from the gross amount instead of the net (post-tax) amount, a larger contribution can be made to the account each month.
Employer Contributions: Since 401(k) plans are generally employer sponsored, many employers offer matched contributions – meaning they match a certain percentage of the amount that employees invest into their accounts.

Drawbacks of a 401(k) plan

Vesting Periods: To protect themselves from losing money, employers typically implement a vesting period; or a duration of time that an employee must continue to work for the company before they can access the contributions that the employer has made to their account. If you leave the job before this period, you will surrender the contributions that the employer has made up until that time.
• Withdrawal Restrictions: In addition to vesting periods, 401(k) plans also usually have a variety of attached withdrawal restrictions. Most plans have many rules concerning when money can be withdrawn, and it can be extremely costly to withdraw funds before this time.

Bonds

Bonds are debt securities, or debt obligations. In exchange for a “loan”, borrowers issue bonds that promise to pay back the loan with interest over a specified time period. Bonds come in many forms, can have various risk levels, and can be offered from a variety of borrowers including corporations, municipalities, and national governments.

The main types of bonds are corporate bonds, high-yield bonds, and municipal bonds.

Corporate Bonds: Debt securities issued by both public and private corporations. Corporate bonds are given a credit rating to assess their level of risk and potential for default. Investment-grade bonds are bonds that have a high credit rating and are generally regarded as “safe” investments. High-yield bonds offer a greater interest rate, but are more risky and have a lower credit rating than those of investment-grade status.
Municipal Bonds: Debt securities issued by city, county and state municipalities. These types of bonds can be backed by the municipality’s assets, or may be issued on a “faith” basis.
U.S. Treasury Bonds: These bonds are issued by the United States Department of the Treasury. Since they are backed by the federal government, they are generally regarded as extremely safe investments. Types of U.S Treasury Bonds can include Treasury Notes, Treasury Bills and Treasury Bonds.

Pros of Bonds

Predictable returns: For most bonds, performance can be predicted and investors know exactly what their return will be. While stock performance can vary, bonds promise to pay back a specific interest rate after a specified duration of time.
Tax-Free Interest: In most cases, the interest earned on municipal and treasury bonds are exempt from federal income tax.

Drawbacks of Bonds

Issuer Default: Especially for higher risk (and lower credit rating) corporate bonds, it is possible that the issuer will fail to make interest or principal payments in a timely manner. Although high-value bonds promise higher interest returns, their potential for payment default is much greater.
Interest Rate Fluctuation: Like stocks, bonds can be bought and sold on the market. If a bond is sold before its maturity date, it may not be worth it’s face value at the time it is sold. When interest rates increase, the value of bonds on the market decrease, since it would be more beneficial for the buyer to purchase a new bond instead of an older one with a lower interest rate.
Liquidity Difficulty: In the wrong circumstances, some bonds may not be easy to get rid of if immediate liquidity is necessary. In other situations, bondholders may take a loss if the current value of their bonds are less than face value.

Annuities

An annuity is an investment product that pays out an income and is generally offered through an insurance company. Annuities require an upfront payment, and guarantee a steady income stream during retirement. There are many different types of annuities available, and each of these can perform much differently in an investor’s portfolio. Some of these annuity options include:

Immediate vs. Deferred Annuities: The difference in the two lies in when the annuity begins paying out. Immediate annuities begin making payments shortly after they are initiated. Deferred annuities on the other hand, start making payments at a specified future date; such as at the start of the investor’s retirement.
Fixed vs. Variable Annuities: Fixed annuities guarantee a specified payout for a certain number of years (or a lifetime). These annuities have a fixed payout and are not based upon the performance of the market. Variable annuities on the other hand, are typically tied to mutual funds and pay out based upon the performance of the funds that the annuity is invested in. Variable annuities have the potential to perform better than fixed annuities, but also carry a far greater risk factor.
Fixed Period vs. Lifetime Annuities: The difference in these two annuity types lie in how long the annuity will pay out. Fixed period annuities make payouts for a specified amount of time – such as 10 or 20 years. Lifetime annuities on the other hand, guarantee a payout until the end of the investor’s life. Since the investor’s lifetime may end up being shorter than expected, the potential for loss is far greater. On the other hand, if the investor outlives their expected lifetime, the annuity may pay out much more than they would have received with a fixed period option.

Pros of Annuities

There are many benefits to annuities, if investors take the time to learn about which options are best for their specific situation. The main pros of annuity products include:

Monthly Income: One of the most attractive benefits of annuities is that they provide a reliable monthly income. Fixed annuities guarantee a specific payout, ensuring that investors will realize an income during their retirement. With lifetime annuities, investors can ensure that they will receive a payout for the rest of their lives; eliminating the worry that their payouts will end during retirement and leave them without an income.
Annuity Options: Annuities provide options that allow investors to make the product more suitable to their specific situation. Living benefits for example, guarantee a certain withdrawal limit, allowing investors to access a specific amount of their investment without heavy fees. Death benefits on the other hand, allow annuities to be transferred to a beneficiary if the life of the annuity owner ends before the annuity does.

Drawbacks of Annuities

Like all investments, annuities also have certain drawbacks. Depending on what company you purchase your annuity through, you may be subject to many attached fees. Some of these include:

Surrender Fees: When you buy an annuity, it can be extremely expensive to withdraw money (outside of the limits of a Living Benefit). In some cases, surrender and withdrawal fees can be as much as 10%. It is best advised to keep an emergency savings available and resist the temptation of withdrawing funds from your annuity.
Commission Fees: Purchasing from annuity brokers can also be expensive, since these brokers can collect commissions as high as 10%. Sometimes these fees aren’t shown up front, but are buried into rather complex contracts. It is always recommended to read your contract carefully and make sure that you understand all commission fees before purchasing an annuity.
Annual Fees: In addition to other expense, insurance companies often charge annual fees for annuity products. These fees can sometimes equal up to 3%, which can lessen the overall value of an annuity – even if it’s paying out a decent return.

Mutual Funds

Investing after retirement strategy - Couple and financial advisor In a mutual fund, money is pooled from many investors and invested into a portfolio that consists of stocks, bonds and other assets. These funds are operated and managed by mutual fund companies; professional managers who seek to find the best investments where the fund will realize the biggest return.

Mutual funds allow individual investors to place their money in a professionally managed portfolio, which in theory, gives them ownership over a small percentage of the overall fund.

Pros of Mutual Funds

Diversification: Compared to other investment vehicles, mutual funds are much more flexible in the types of products they invest in, and allow you to quickly diversify your portfolio. Diversity ensures that your portfolio doesn’t lean too far into one investment. In the case that one investment does not perform well, in many cases, the loss is balanced by better performing investments within the mutual fund’s portfolio.
Professionally Managed: Mutual funds are managed by professional and experienced investors, who back their investments choices by heavy research and consideration. These experts are dedicated to ensuring that the portfolio performs well, which takes away the difficulty of managing your own portfolio investments.
Risk Management: Although fund managers choose the investments that the funds will be placed in, investors can usually decide what level of risk they are willing to accept. Those who want a safer and more conservative portfolio can choose a lower risk level where the majority of their funds will be placed into safer investments like bonds. Those with a greater risk profile can choose a more aggressive mutual fund strategy where the bulk of their portfolio will be invested into higher risk investments such as stocks.

Drawbacks of Mutual Funds

Minimum Control: While investors have control over the level of risk they are willing to accept, they don’t have any control over what specific investments the fund will choose to invest in.
Fees: Mutual funds may also be subject to several fees and expenses. In many cases, mutual funds may add a sales charge on purchases – or a front end “load” that is charged to initially be included in the fund. Mutual funds also charge annual management fees, which are usually equal to around 1.5%.
• Too Much Diversification: Some mutual funds are overly diversified, meaning that they are spread too thin to make any significant gains. In this situation, if one investment does perform extremely well, only a miniscule portion of your portfolio will actually be dedicated to this specific investment.

What’s Right For Your Retirement Portfolio?

All of these investment types are feasible and reliable options, and in theory, all of them have great benefits in the right portfolio. What’s beneficial for one person’s financial situation however, may not be beneficial for another person’s. It is important to deeply research your options and find out which vehicles will help you reach your specific financial goals. Knowing how fees work, how withdrawals are handled, how risky and how liquid an investment is, should all be considered when deciding what investments your portfolio should consist of.

Still undecided about what investments you should add to your portfolio? Check out our network of trusted financial advisors to find a reputable advisor near you, and discuss what options are best for your specific financial situation.

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Annuity Vs Perpetuity: Can Annuities Be Perpetual? https://www.annuitieshq.com/articles/annuities-vs-perpetuity-can-annuities-be-perpetual/ Thu, 05 Oct 2017 16:45:34 +0000 https://www.annuitieshq.com/?p=25971 Annuities may seem complex to someone who is unfamiliar with how they work. Many times, new investors seek to understand annuities by comparing them to investments and terms that they are more familiar with and drawing out the pros and cons of each — such as annuity vs mutual fund or annuity vs perpetuity. With […]

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Annuities may seem complex to someone who is unfamiliar with how they work. Many times, new investors seek to understand annuities by comparing them to investments and terms that they are more familiar with and drawing out the pros and cons of each — such as annuity vs mutual fund or annuity vs perpetuity. With many different annuity types and durations available, sometimes investors don’t fully understand the term lengths of annuities. Can they pay back for a lifetime? Can they pay back forever? In this post, we will examine the definitions of annuity and perpetuity and answer the question, “Can Annuities Be Perpetual?”.

What is an Annuity?

In general, the term “annuity” refers to an investment product that is sold by insurance companies. These investments are offered in fixed or variable options. Fixed options pay a guaranteed minimum, while variable options are backed by a chosen investment portfolio and pay out based upon the performance of that portfolio.

Traditional annuities are designed to make payouts over a specified and limited amount of time. These payouts may last for 10 years, 20 years, a lifetime, or any other term-limit agreed upon by the investor and the insurance company.

What is a Perpetuity?

A perpetuity can take form as several different types of investments. The word itself derives from the Latin adjective “perpetuus”; which means continuous or uninterrupted. In other words, a perpetuity is a bond or other type of security that has no fixed maturity date. Payouts never end, because by definition, perpetuities make payouts forever.

An example of a perpetuity in bond form, is the UK’s government bond – known as a “Consol”. By purchasing a Consol, bondholders are guaranteed an interest payment on an annual basis for as long as they hold the bond, and as long as the Consol is not discontinued by the government.

Can An Annuity Be Perpetual?

There is only one difference between a traditional annuity and a perpetuity – an annuity pays for a set number of years (or for a lifetime) while a perpetuity pays an income indefinitely.

By it’s general definition, the word “annuity” not only refers to an investment product, but is defined as “a fixed sum of money paid to someone each year.” Most annuity products are not perpetual, as they eventually expire and stop paying out. This means that all perpetuities are annuities by definition, but not all (and not many) annuities are perpetuities.

In theory, an annuity can be a perpetuity depending on how it is designed. If it is designed so that payments last forever, even after the investor’s lifetime, then it is considered a perpetual annuity. An insurance company, for example, may sell securities that guarantee a small payment forever. Traditional and perpetual annuities are both types of annuities, but they are differentiated from each other based on the duration of their payments.

Calculating Present Value

Since one option has a defined ending term and the other has no defined term, there is a major difference in how present value is calculated for each type of investment.

Annuities

The “present value of an annuity formula” allows investors to determine the current value of future periodic payments. Since there is a defined ending term, the formula depends on three factors: amount of payment per period, the rate of interest per period, and the total number of periods in which the payment will be made. To calculate the present value of a traditional annuity, the following formula is used:

Equation for Calculating Present Value of Annuity

Using this equation, we could calculate the present value of an annuity where $500 (P) is paid at the end of each month for an entire year (n=12) with an annual interest rate of 12% (i = 12%/12 months = 1%). By plugging these numbers into the equation, we would discover that at the beginning of our term, our annuity’s present value would be equal to $5,627.54.

Perpetuities

Although a perpetuity may promise to pay you forever, it does not maintain its value indefinitely. Most of the value of a perpetuity is earned in the near future rather than in the long-term. Since there is no defined end date on a perpetuity, the formula for calculating a perpetuity’s present value depends on the annual payout and a discount rate defined by the investor. Specifically, the present value for a perpetuity is calculated with the following formula:

If a perpetual bond pays you $1000 per year for instance, and you believe that a 5% return is suitable for your particular perpetual bond, your present value would be equal to $1000 / .05, or $20,000. This means that at a price a $20,000, someone could purchase your perpetual investment from you and receive a 5% return on their investment. The present value of a perpetuity (or perpetual annuity) increases as the discount rate increases. If this same annuity paid out $1000 but was valued with only a 3% discount rate, for instance, it’s present value would rise to $33,333.

A Final Note

Here’s the catch – perpetual annuities, bonds, and other investments are extremely rare. The few that have existed in the past generally also included specific conditions that allowed for ending the perpetuity and exiting the agreement. Let’s face it, no one, including insurance companies and the government, wants to be responsible for owing someone until the end of time.

Although it is unlikely that you will ever come across a true annuity that pays out for an indefinite term, there are many annuity options that will pay out long enough for you to meet the terms of any long-term financial plan that you may have. There are many annuity options available that carry a lifetime payout, and some that even carry a death benefit that can be transferred to a beneficiary at the end of the investor’s life.

Ready to see what type of annuity is right for your portfolio? View our Advisor Directory to find a hand-selected, trusted and reliable advisor that can help you today!

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Planning for Retirement: Annuities vs Mutual Funds https://www.annuitieshq.com/articles/planning-for-retirement-annuities-vs-mutual-funds/ Tue, 19 Sep 2017 16:01:53 +0000 https://www.annuitieshq.com/?p=25887 When considering what investment options should be chosen for retirement, there is often a question of “Annuities vs Mutual Funds – which one is best?” The truth of the matter is, both of these options are viable investments, and both have their pros and cons. The key to making a favorable decision is to compare […]

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When considering what investment options should be chosen for retirement, there is often a question of “Annuities vs Mutual Funds – which one is best?” The truth of the matter is, both of these options are viable investments, and both have their pros and cons. The key to making a favorable decision is to compare the two to see which is best in general, and more specifically, to assess both options to see which is best for your particular portfolio; or even, whether you should include both assets in your retirement portfolio.

Before deciding to invest in any vehicle, it is important to understand how each vehicle works and how it can affect your portfolio both now and in the future. In the following post, we will explore the pros and cons of each to finally allow you to answer, “Annuities vs mutual funds, which one should I rely on for my retirement?”

What are Annuities?

In the most general terms, annuities are tax-deferred investments that are sold by insurance companies. Annuities allow you to grow your nest egg until you are ready to retire, and then begin receiving an income that will be paid out to you for the remainder of your life. There are several different types of annuities however, each of which are suited towards a different type of investor. The most popular annuities are fixed and variable annuities.

Fixed Annuities: A fixed annuity is a type of annuity that allows individuals to accumulate capital on a tax-deferred basis. With fixed annuities, investors pay a lump sum of money in exchange for a guaranteed income payout for either a specified term or for their entire life. These annuities guarantee the principal investment along with with a specified rate of interest.

Variable Annuities: Unlike fixed annuities, variable annuities do not provide a guaranteed payment. Instead, a variable annuity is a retirement vehicle that provides investors with a choice of several fund options. At retirement, variable annuities pay back a level of income that is determined by the performance of the selected investments.

What are Mutual Funds?

Annuities vs Mutual Funds - Tablet with Mutual Fund on screenThe term “mutual funds” refers to a managed portfolio of stocks and/or bonds. In general, a mutual fund company combines the investments of a large group of people and invests this money (on the group’s behalf) into the mutual fund portfolio. Each individual within the group owns shares in the mutual fund. Those who invest in mutual funds can earn income in several ways:

  1. Dividends on stocks and interest on bonds that are held in the fund’s portfolio.
  2. Distribution of capital gains, if the fund sells securities that have increased in price.
  3. Selling shares for profit in the market, if a funds’ holdings grow leading to an increase in the price of shares.

Annuities vs Mutual Funds: Are They Similar?

Although annuities and mutual funds are vastly different, there are some qualities that both financial vehicles share.

‌• Fees: Like most managed investment vehicles, annuities and mutual funds both have attached fees that the investor will be responsible for.
– Mutual Funds: There are several fees associated with mutual funds. Companies typically charge sales commissions (loads) each time the investor buys or sells shares. Also, funds often deduct fees to cover their annual operating expenses.
– Annuities: Annuities usually do not have any upfront fees, although some deferred annuities include annual operating fees that may be equal to 2-3% of the contract’s value.

‌• Market Dependence: While fixed annuities have a specific guaranteed payout, the performance of variable annuities and mutual funds are highly dependent upon the health of the market. Depending on how a mutual fund or variable annuity is allocated, your rate of interest or return can vary; reflecting the performance of the stocks and bonds that make up the portfolio. This also means that with both vehicles, there is the potential of losing some or all of your principle if the market declines. In the case of fixed annuities however, the performance of the stock market is not an issue, since its interest rates are fixed for the life of the annuity.

Professional Management: Variable annuities and mutual funds are both professionally managed, allowing investors to invest without having to directly manage the investments in their portfolio (or the assets of the investment funds underlying the variable annuity).

Advantage of Mutual Funds

In some cases, variable annuities behave similarly to mutual funds. In fact, a variable annuity is basically a mutual fund inside of a tax-deferred wrapper. One of the advantages of mutual funds however, is that they give a greater level of flexibility in terms of their investment options. While variable annuities often provide less than 40 choices, mutual funds can include up to thousands of investment choices.

Mutual funds are also more liquid than annuities. Unlike annuities, they can be bought and sold at any time. Annuities are expected to be held throughout the contract’s term, and can be subject to high fees and taxation for early withdrawal. While mutual funds have a higher liquidity, selling your mutual fund can also be costly. Some mutual funds have back-end loads, meaning that when you sell your fund, charges (typically around 2%) will be deducted from your total redemption value. Furthermore, if your mutual fund has realized any capital gains in the past, you may be subject to capital gain taxes.

Mutual funds are generally the most well-known option. Today, there are over 8000 mutual funds that exist to serve American investors.

Advantages of Annuities

While mutual funds are more widely understood than annuities, annuity options carry many advantages.

For fixed annuities, there is one major advantage that other options do not provide – a guaranteed payment and interest rate. Shielding investors from losses due to negative stock performance is the largest advantage of fixed annuities over mutual funds. While some investors choose more aggressive investment options, others choose to eliminate their portfolio’s risk by placing their money into a sure thing — fixed annuities. With mutual funds and variable annuities, clients are dependent upon the money manager’s skills and ability to make good investment decisions. If a mutual fund loses money, so do the investors.

“While mutual funds are more widely understood that annuities, annuity options carry many advantages.”

 

Although mutual fund investors can liquidate easily, variable annuities allow investors to switch from one investment to another (within the company’s option menu) without paying taxes. Mutual funds on the other hand, have front-end and/or back-end loads, that can cost mutual fund owners each time they buy and sell. Furthermore, each time the investor sells their mutual fund to invest in another, they open themselves up to potential tax responsibilities.

Many annuities also offer living benefits that mutual funds cannot provide. Some annuity contracts, for example, allow for withdrawals without penalty for certain situations. There are many different types of living benefits which include:

‌• Guaranteed Minimum Accumulation Benefit – A GMAB is a guarantee that the annuity’s value will not fall below the principal investment amount, no matter how it’s underlying investments perform.

• Guaranteed Minimum Withdrawal Benefit – A GMWB is a guarantee that allows the annuitant to receive a stated number of withdrawals from the annuity.

• Guaranteed Minimum Income Benefit – A GMIB guarantees a minimum return on the principal, no matter how it’s underlying investments perform.

Other living benefits allow stipulations for annuitants to withdraw money for things like nursing home stays, without being subject to a penalty. Although investing in mutual funds may provide more flexibility than investing in an annuity, risks can be mitigated or even eliminated with a fixed annuity, or a variable annuity that includes certain guarantees.

All retirement accounts have some type of beneficiary option that allows investors to transfer money to their heirs, but many annuities offer highly attractive death benefits that mutual funds do not. With most investments (including mutual funds), beneficiaries receive funds equal to the current value of the account. Some annuities however, offer benefits that allow beneficiaries to potentially receive more than the amount in which the account is valued. A high water death benefit, for example, isn’t based on the current value of the account; but instead, is based on the highest level attained by the reference index over a period of time. For instance, if the given equity index ends the year at 525, but it’s highest point during the year was 550, heirs would likely be credited some portion of that difference.

Choosing the Right Option for Your Portfolio

Deciding which route is best for you will be specific to your personal financial situation. Your choice should consider many factors including age, life expectancy, liquidity needs, and the makeup of your current portfolio.

Want to know if an annuity would be right for your retirement portfolio? Browse our Advisor Directory and find a trusted annuity advisor to help you meet your retirement goal!

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Are Annuities Good Or Bad? It Depends Actually. https://www.annuitieshq.com/articles/annuities-good-bad-depends-actually/ Fri, 28 Jul 2017 17:20:39 +0000 https://www.annuitieshq.com/?p=25290 “The truth is, annuities are like any other financial tool or investment vehicle; they are great for some financial situations and not-so-great for others.” A quick Google search for the word “annuities” will bring up several opinions about annuity investments. Before making any decisions that will impact your retirement income, you’ll want to look at […]

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“The truth is, annuities are like any other financial tool or investment vehicle; they are great for some financial situations and not-so-great for others.”

A quick Google search for the word “annuities” will bring up several opinions about annuity investments. Before making any decisions that will impact your retirement income, you’ll want to look at annuities pros and cons closely. Sometimes, this mix of perspective can be confusing to investors who really just want to know “are annuities a good investment?” or whether they are an investment that should generally be avoided. The reason that opinions are so varied is that the answer is somewhat complex and can’t be summed up with a simple “yes” or “no”.

The truth is, annuities are like any other financial tool or investment vehicle; an annuity can be a great choice for some financial situations and not-so-great for others. Whether an annuity is good or bad (for you!) is highly dependent upon your personal financial situation, the goals you have set forth, and the time span in which you plan for those goals to be met. Depending on various factors regarding your personal situation, annuities can actually be “good” or “bad”. We can’t tell you whether an annuity is right for you, but in the following article we will give you some tips to help you answer the question, “Are annuities good or bad for my portfolio?” for yourself.

 

What is an annuity?

Knowing exactly what an annuity is is the first step to deciding whether it is a proper investment for your portfolio. An annuity is an insurance product that pays out income and is popular for investors who want to receive a steady and consistent income stream during their retirement years. Specifically, an annuity is a contract between an individual and a third party, which is usually an insurance company. In exchange for a lump sum payment, the insurance company promises, through an annuity, to provide an income for a specified period of time; asset growth and accumulation; a death benefit; and long-term care benefits.  For additional details, view our Annuities for Dummies article.

 

Different types of annuities

Generally, there are two types of annuities, fixed and variable; and two options for each, immediate and deferred.

With fixed annuities, in exchange for a lump sum payment, the life insurance company will pay a guaranteed fixed rate of interest while also guaranteeing the principal investment. Variable annuities do not have a fixed interest but require that the investor decides how to invest their money by choosing between various sub accounts offered within the annuity. The performance of these funds will impact the value of the investor’s account, whether positively or negatively.

Within fixed and variable annuities, investors can choose between two annuity options:

  1. Immediate: Income begins shortly after the investor’s initial lump sum payment.  This option starts paying within a year and is considered by some experts to be the best type of annuity for retirement.
  2. Deferred: This annuity accumulates money over time and does not pay out immediately. Typically, payments are deferred anywhere between 1-50 years. The annuity owner can decide to convert their deferred annuity into an immediate annuity when they are ready to begin collecting payments.

    The Benefits of Annuities

    Are annuities good? When used for the right purpose, annuities can be a powerful financial planning tool. The main value of an annuity is that they can help stabilize an investor’s portfolio and they provide excellent tax benefits. Unlike 401ks and IRAs, annuities do not have an annual contribution limit; which allows investors to put away more money for their retirement. Additionally:

    ‌• Money invested in an annuity grows tax-deferred. Money compounds consistently without being taxed.
    Retirees can set up their annuity to ensure guaranteed consistent payments for a specific length of time, or for the rest of their lives.

    Are annuities good for retirement? In many cases, annuities work best when they are used to support other retirement income sources within an investor’s portfolio.

    Are variable annuities a good investment? Variable annuities are often best suited for individuals who can tolerate a specific level of risk within their portfolio and are seeking higher appreciation on their investments.

     

    The Drawbacks of Annuities

    Why are annuities bad? When people speak about why annuities are a poor investment choice, their argument often cites high associated fees and mixed with perspective from buyers who purchased annuities without considering how well it fit (or didn’t fit) into their specific long-term financial goals. Annuities can be powerful for the right situation, but on the other hand, they can be damaging to those who end up pulling money out too early or those who purchased their annuity from high-commission brokers and salespeople. Charges and fees vary among different types of annuities, whether fixed, variable, immediate or deferred. Fees that you may come across as you search annuity options include:

    Commissions: Salespeople will collect a commission, which sometimes can be as high as 10%.

    Insurance Charges: Also referred to as mortality and expense (M&E) fees and administrative fees. These fees pay for insurance guarantees that are automatically included in the annuity, along with selling and administrative expenses.

    Surrender Charges: If you pull money out of your account too early, you will likely face a surrender charge. Typically the surrender charge is 7% of your account value if you leave after the first year, and decreases by a single percentage point each year until it reaches zero.

    Annual Fees: Most variable accounts come with high annual expenses; insurance charges that can run more than 1.25% of the account’s value.

    Investment Management Fees:  Often, variable annuities are subject to investment management fees, which are similar to management fees on mutual funds.

    Other drawbacks of an annuity that are often mentioned, include:

    Illiquidity: Annuities aren’t often recommended for younger individuals or those with immediate liquidity needs. The lump sum put into the annuity is generally illiquid and subject to stiff withdrawal penalties. In emergency situations where funds are needed immediately, owners who withdraw partially or in full may lose significant value. Difficult to Understand: Sometimes it can be difficult for even seasoned investors to understand the ins and outs of some annuities. The language and terms can sometimes be complex and some salespeople may not explain associated fees and charges in a way that is completely transparent to the buyer.

    Paying for Guarantees: Many annuities come with guarantees that are extremely comforting to buyers, but investors pay heavily for these guarantees. While some salespeople use these guarantees to “sweeten the deal”, buyers are sometimes unaware that they are actually paying for and funding these insurances.

    Guaranteed Guarantees?: Annuities are guaranteed, technically. As demonstrated by American International Group Inc. during the financial crisis though; even a $100 billion insurance company could potentially collapse. In this type of case, annuity policies held by a company that declares bankruptcy could come down to a matter of the language in a particular agreement.

     

    Are Annuities a Good Idea for Retirement?

    Before purchasing an annuity, there are several questions to ask yourself, and many elements to consider. Start off by doing heavy research on annuities before speaking to a salesperson about what annuity products they offer. Once you have decided that an annuity is the proper investment vehicle to add to your portfolio, consider the following:

    • Make certain that you dealing with a reputable insurance company that will deliver on its annuity promises. Don’t just take a salesperson’s word for it. Check how the company is rated through:
    – AM Best: Highly trusted insurance companies are rated as A++ and A+.
    – Fitch: Insurance companies that are top rated are given ratings between AAA and A.
    – Moody’s and S&P: These entities also rate top quality insurance companies between AAA and A.
    • Review the numbers carefully. Don’t buy into an annuity until you know how much the contract will cost annually, including all expenses. Understand what types of charges you will face if you withdraw from your account early, and ensure that you have emergency funds available so you do not have to withdraw from your account until your surrender charge percentage has reached 0%.
    • Remember that guarantees are not free. Don’t allow a salesperson to over-promise and over-sell you. While many of these guarantees and protections are great, keep in mind that they do translate into additional fees and costs.

     

    Annuities Good or Bad Idea? Here’s How to Know:

    Finally, if you have gone through these steps and are still unsure about whether annuities are a good or bad choice, find a financial service professional who can help. A properly licensed and credentialed financial advisor such as a Chartered Life Underwriter, Chartered Financial Consultant or Certified Financial Planner can help you evaluate your current financial situation; and assist you with reviewing and evaluating annuity contracts.

    Ready to find the best advisors to discuss the purchase of an annuity? Or are you still wondering, should I invest in an annuity? We’ve made it easy for you to find a trusted financial advisor to review your financial plans and help you make an educated decision. Visit our Advisor Directory and connect with a Trusted Financial Advisor in your city today!

 

COMPARE TOP ANNUITY RATES TODAY

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10 Questions to Ask Before You Buy an Annuity https://www.annuitieshq.com/articles/10-questions-to-ask-before-you-buy-an-annuity/ Thu, 08 Jun 2017 16:51:12 +0000 https://www.annuitieshq.com/?p=25233 You’ve probably already asked yourself Question Number One,   1. Should I buy an annuity? And if you’ve done even a simple Google search to start answering this question, you’ve already discovered that there is a lot of information out there – but not all of it is helpful or accurate. And you’ve probably got […]

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You’ve probably already asked yourself Question Number One,

 

1. Should I buy an annuity?

And if you’ve done even a simple Google search to start answering this question, you’ve already discovered that there is a lot of information out there – but not all of it is helpful or accurate. And you’ve probably got even more questions now, right?

Don’t worry – we’re here to shine a light on the right questions to ask a financial advisor to help you decide if an annuity is a right choice for your retirement plan.

questions to ask before buying annuities

 

But first, some basics.

2. What is an annuity?

An annuity is an investment product that you buy from an insurance company. You’ll purchase the annuity with a lump sum payment, in exchange for their guarantee to pay you a monthly, or yearly, payment. Learn more about what annuities are

3. What type of annuities are available?

Annuities have become more complex over the years, but you’ll most likely be looking at one of two common options – a fixed annuity or a variable annuity. A fixed annuity offers a guaranteed payment, dependent on the projected returns of the provider’s investments, and the holder’s life expectancy. This is a great option if you’re looking to buy an annuity as a long-term, stable investment. On the other hand, a variable annuity gives the provider the ability to invest in stock and fixed-income accounts, so the annuity value will change with fluctuations in the market. The payouts for a variable annuity can change on a yearly basis, but there is the potential for a higher return over the long-term. See all types of annuities

4. How can I make sure I’ll receive my promised benefits?

Like any investment, buying an annuity does come with some risk. However, there are many ways to diminish this risk so you can feel confident in your purchase. One important step is to review the credit ratings of the insurance company, or companies, that you’re interested in purchasing an annuity from. Each of the financial rating companies, like Standard & Poor’s or Moody, have their own rating scale, but in general, look to purchase from insurance companies that hold ratings of A++ or AAA. This rating system extends to the salesperson you’re working with – make sure they can provide you with an AM Best rating.

5. How much does an annuity cost?

The cost of your annuity will depend on plenty of factors – like whether it’s immediate or deferred, or if you’re purchasing spousal protection. Administrative fees and other internal costs will also be included, so you’ll want to review each of these fees closely with your advisor.

6. Will the movement of the stock market affect how much my annuity is worth?

Yes, if you have a variable annuity its value will be impacted by changes in the stock market. When determining if a variable annuity is right for you, be sure to factor in any related fees that you are paying – like administrative or asset management fees. Those fees will be deducted annually from the total value of your annuity, so if you do incur some losses during a flat market year, it’ll be that much more of a pinch when those fees are included.

7. Will inflation impact my annuity?

It can, but there are annuities available that protect for inflation. It will lower your annual payments at first, but in the long run (15+ years), an ‘inflation adjusted’ option is a good investment.

8. What’s better – an annuity or a mutual fund?

It’s not so much about better as it is about what’s going to work for your specific circumstances. An annuity can cost more than a mutual fund, but it also offers guarantees that aren’t offered with a mutual fund – like a minimum death benefit or creditor protection.

9. Do I need to work with a financial advisor to buy an annuity?

It’s not required, but it is recommended. As their popularity has grown, annuities have become more complex financial products. To make sure you’re getting the best value for your investment, and that the annuity returns will meet your financial needs during retirement, it’s best to discuss the details with an experienced, licensed advisor.

10. When do you want to start receiving income from your annuity?

With an immediate annuity, you’ll start receiving payments, typically on a monthly basis, that will last for the remainder of your life. You’ll pay a premium rate for this, which will vary depending on your age when you make the purchase and life expectancy.

A deferred annuity is different in that you won’t see a return right away. These types of annuities are paid out on an annual basis and are a good option if you’re looking for a long-term investment. Before making any decisions, speak with an experienced financial advisor.

 

These questions will help guide you in choosing if an annuity is right for you, and if so, which one will suit your financial needs for years to come.

 

Interested in receiving a no obligation annuity report today?

Get in touch

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Best Annuities for Retirement https://www.annuitieshq.com/articles/best-annuities-for-retirement/ Tue, 07 Mar 2017 00:01:17 +0000 https://www.annuitieshq.com/?p=25235 Retirement is an exciting and overwhelming time. You are thrilled with your new freedom and are ready to experience life – sign up for classes, spend time with family, kick your legs up and have a drink, or just relax. But with this freedom also comes an uncertainty about your financial future and how you […]

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Retirement is an exciting and overwhelming time.

You are thrilled with your new freedom and are ready to experience life – sign up for classes, spend time with family, kick your legs up and have a drink, or just relax. But with this freedom also comes an uncertainty about your financial future and how you are going to fund your day-to-day life and amazing adventures. There are several types of investments that could provide you with the income you need; one option to build your financial future is through annuities. But this decision also comes with several questions. What is the best type of annuity to buy? What are the best annuities for retirees? And if I go this route, how do I get the best annuity rates?

best annuities for retirement income

 

First, before you can decide on the best annuity for you, let’s discuss what an annuity is. Annuities are sold by insurance companies to people who wish to make sure that they are going to have enough money to last them for the rest of their lives. To determine if annuities are right for you, answer yes or no to the following questions:

 

– Do you want guaranteed income for life?

– Do you want guaranteed income for a spouse?

– Do you want safe investments? 

– Do you want to protect your retirement from taxes?

If you answered yes to at least one of these four questions, investing in annuities may be a good option to consider.

 

Best Retirement Annuities: Know Your Options 

Annuities for retirement can make a lot of sense if you worry about making safe choices and want retirement income. There are three types of annuities that tend to be the most popular for retirement income.

Fixed Annuities:

In their most basic form, they resemble a classic pension. Fixed annuities pay set rates, meaning the interest rate will never change on the investment; you will receive a set amount of money.  This makes a fixed annuity a popular option for retirees who want to have a known income stream.

Equity-Indexed Annuities:

A special class of annuities that provide you with income depending on how well an index does, like the S&P 500.  EIAs promise to pay you the minimum agreed upon interest rate, even if it is higher than the index’s rate. On the plus side, if the index has a higher rate, you will receive income reflective of the rate change.

Variable Annuities:

A variable annuity offers a range of investment options. Variable annuities are mutual fund investments. Mutual funds are bonds, money market instruments, or a combination of the two.  The annuity payments will reflect any interest rate fluctuations of the mutual fund.

 invest in an annuity for retirement

Choosing An Annuity: 
Investment Management Companies 

Choosing the correct annuities that fit your retirement needs is a daunting task. There are many investment companies that can help you determine the best annuities for your retirement goals. Provided below are three investment management company annuity reviews.

Fidelity Annuity Reviews: Fidelity provides an annuity comparison table. Fidelity has a receptive customer service that provides guidance throughout the investment process.

Vanguard Annuity Reviews: Vanguard lists four questions to ask yourself when considering an annuity. Vanguard is known for catering towards retirement investors, those with high account balances.

Charles Schwab Annuity Reviews: Charles Schwab provides a video and infographic on annuities. They also have a chart on the costs and initial contributions needed for each annuity.

 

Reach out to an Annuity Advisor 

A trusted annuity advisor can help guide you towards the best financial plan for your retirement, including choosing the best annuities for income for the years ahead. If you have questions about annuities and how you can use them, contact one of our trusted annuity advisors today!

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401k Rollover to Annuity https://www.annuitieshq.com/articles/401k-rollover-to-annuity/ Thu, 19 Jan 2017 01:09:43 +0000 https://www.annuitieshq.com/?p=25238 The finance world can be rather confusing with all of its different terms if you are not a professional in the field. With different types of retirement plans, advantages and disadvantages for each and fees associated with every type, one can easily decide to brush off the importance of learning the basics. There are many […]

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The finance world can be rather confusing with all of its different terms if you are not a professional in the field. With different types of retirement plans, advantages and disadvantages for each and fees associated with every type, one can easily decide to brush off the importance of learning the basics. There are many benefits, for example, in understanding how a 401k rollover to annuity is beneficial for you. Now if I go back and read this last sentence, I feel as though I am already overloading you with words you may be unfamiliar with. We will cover the magic of a 401k rollover to annuity and the benefits of considering this option with your financial advisor.

401k rollover to annuity

 

401k vs Annuity

Let’s start with understanding what a 401k is. A 401k is a savings plan that is geared towards the workplace and its employees. It allows employees to invest a portion of their paycheck before taxes are taken out. This savings then grows tax-free until retirement age and its withdrawals are taxed as income. Now, what is the difference between an annuity vs a 401k? An annuity is a contract between you and a 3rd party where you make an exchange by making a lump sum payment and are provided with an income for a certain period of time (or for life), a death benefit, long term care benefits and growth on your assets.

Both a 401k and an annuity has its separate advantages (read more about the pros and cons of annuities) but how does one convert a 401k to an annuity and what are its benefits? Now you’re thinking in the right direction and getting the hang of this! Let’s see what happens when you consider this type of retirement plan and make a list of all of the benefits.

When you hear the words 401k rollover, this simply means that your 401k funds are being transferred into another qualified retirement account. In this instance, we will consider the benefits of a 401k rollover to annuity. We will discuss the eight main benefits:

1) Control

– Annuities allow you to have control over your savings. Rather than your employer or plan sponsor having direct control over your savings fund, the control is transferred to you.

2) Costs

– The costs between an annuity vs a 401k is significant enough that it is important to take note. 401k costs usually range between 1%-2% but can go up as high as 2.5% or more! Depending on the type of annuity and options one adds, they can be significantly less than the employer-sponsored plan costs.

3) Consolidation

– The majority of people will change employers throughout their life. With a 401k converted to an annuity, you are able to consolidate the multiple plans that you have with multiple employers. This making managing your money easier on your end as you can see all of your money in one place.

4) Protection

– Rolling your 401k to an annuity also adds an extra level of protection. You are protected from market risk and longevity risk. Market risk is simply the risk that is part of the value of your investment in which it can decrease due to moves in the stock market. Longevity risk is important to consider because of how much life expectancy has increased. Annuities allow for a lifetime payout rather than worrying about running out of money in your 401k if you end up living longer than expected.

5) Risk Certainty

– Annuities allow you to have risk certainty that cannot be matched anywhere else. In other words, market losses will not hurt your annuity savings.

6) Planned giving

– Charitable gift annuities allow you to contribute to your charity of choice on a scheduled basis. These annuities also have the advantage of being low cost, pay you income over your lifetime and extra tax benefits while you are alive. Once you pass away, any money that remains will go to your designated charity of choice or your heirs.

7) Avoiding Probate

– When one passes away, you do not want your loved ones to have to go through probate to access the money. By rolling your 401k to an annuity, you pass this hoop as an annuity is transferred directly to your listed beneficiary.

8) Peace of Mind

– The above benefits all come down to the most important factor. They all provide you and your family peace of mind.

 

It is important to consider all of your options and sit down with a financial professional to weigh out the pros and cons of each option and use what benefits you. A 401k rollover to an annuity is a great start to a further look into the benefits of putting your money to work for you for retirement.

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What Does the New DOL Fiduciary Rule Mean for You? https://www.annuitieshq.com/articles/new-dol-fiduciary-rule/ Fri, 16 Dec 2016 23:35:27 +0000 https://www.annuitieshq.com/?p=25240 After many years of deliberations and public hearings, the Department of Labor (DOL) is implementing a new fiduciary rule with regards financial advisors who represent plans covered by the Employee Retirement Income Security Act of 1974 (ERISA). The new DOL fiduciary rule requires all financial professionals associating with retirement plans or providing retirement planning guidance […]

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After many years of deliberations and public hearings, the Department of Labor (DOL) is implementing a new fiduciary rule with regards financial advisors who represent plans covered by the Employee Retirement Income Security Act of 1974 (ERISA). The new DOL fiduciary rule requires all financial professionals associating with retirement plans or providing retirement planning guidance to be ethically and legally bound to fiduciary standards.

new fiduciary rules from department of labor

What is a fiduciary?

The simple definition of fiduciary says that a fiduciary is a person to whom someone has given their utmost trust and confidence to protect and manage financial assets. The DOL fiduciary rule is going beyond the simple definition and going with a legal interpretation that defines fiduciary duty as acting in the best interest of the beneficiary without any self-dealing or conflict of interest. The fiduciary is assumed to have greater knowledge and expertise than the beneficiary and must always put the needs of the beneficiary first.

—> An example is a stockbroker who sets aside all consideration of commissions when considering what investment is best for the client.

Previously, the investment advice fiduciary standards of ERISA were enforceable under the standard of suitability. An investment recommendation that met the stated objective and needs of the client was appropriate. Commissions and fees paid to the financial advisor did not matter unless they were overly excessive.

The problem with the suitability standard is that investors often paid unnecessary fees. These fees serve as a drag on investor returns. With more than $24 trillion in retirement assets including more than $7.5 trillion in Individual Retirement Accounts (IRAs), the extra fees are conservatively estimated to be more than $20 billion per year.

 

Does the new fiduciary rule apply to my investments?

The DOL fiduciary rule applies to defined contribution plans including all 401(k) plans, Simplified Employee Pension (SEP) plans, savings incentive match plans (Simple IRA), employee stock ownership plans, and 403(b) plans. The new fiduciary standard also applies to all traditional defined benefit plans and IRAs. After-tax investments in standard brokerage are not part of the new Department of Labor rules.

Registered Investment Advisors (RIA) and fee-only financial advisors will experience little change from the new fiduciary rule. However, securities brokers and insurance agents who receive the bulk of their compensation from commissions will be in a tough place in their new role as fiduciary advisors. Commission based products will still exist, but financial advisors will be required to obtain a signed Best Interest Contract Exemption (BICE) from their clients. The BICE is a statement on the client’s part that they understand all the details regarding the financial representative’s compensation. The financial advisor needs to fully disclose in plain language all forms of direct and indirect compensation.

The investments hit hardest by the new DOL fiduciary rule are front-end loaded mutual funds, funds that have 12b-1 marketing fees, and some forms of annuities. Many brokerage firms that offer these kinds of plans are already adjusting their fees, and commission schedules to plans reward the longevity of investments in a fund at the expense of a broker’s upfront compensation. A few of the larger brokerage houses are eliminating all commission based retirement plan options except for self-directed investment accounts where the client is responsible for all investment decisions. Other firms plan on continuing with commission-based systems but will require all clients to sign a BICE and provide the clients with ongoing disclosure information.

 

How Will the DOL Fiduciary Rule Affect Annuities?

Insurance companies underwriting annuity products will need to make adjustments as these products normally pay upfront commissions. Some annuity plans have already been under fire for aggressive fee schedules. However, better run insurance companies have been making changes to annuities by lowering fee schedules and making voluntary disclosures to compete better with mutual funds. Specific new policies are coming that are a smoother fit with the new rules. The new policies are simplified only to include the best features that annuities have to offer such as portfolio protection, guaranteed returns, and potentially guaranteed income. Over time, annuities could become a much better investment option with this increase in transparency.

The immediate winners from the implementation of the new DOL fiduciary rule are investors who need no hand holding from a financial advisor when making decisions. Potential losers are people who used to get free advice from brokers who earned commissions and now must pay advisory fees to learn about their options. Financial firms that rely on the commission and extra fee income to run a sales force will also take a short-term hit. The implementation of a streamlined and more ethical system will reward everybody with lower fees and better returns. Even the brokerage houses will eventually benefit from the increasing receipts of standard account fees earned on larger client account balances.

 

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Annuity Payout Options https://www.annuitieshq.com/articles/annuity-payout-options/ Wed, 14 Dec 2016 17:38:22 +0000 https://www.annuitieshq.com/?p=25242 Annuities act as an insurance product that pays you income and some investors use them as part of their retirement strategy. There are three different types of annuities, including fixed annuities, variable annuities, and equity-indexed annuities. Each differs in investment strategies, fees, risk tolerance and returns. Along with different types of annuities, there are different […]

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Annuities act as an insurance product that pays you income and some investors use them as part of their retirement strategy. There are three different types of annuities, including fixed annuities, variable annuities, and equity-indexed annuities. Each differs in investment strategies, fees, risk tolerance and returns. Along with different types of annuities, there are different annuity riders that are an addition to your annuity that may expand the policy’s benefits or exclude certain conditions from the annuity’s coverage. Therefore, it is important to speak to a financial professional to learn which annuity (and annuity payout option) suits your needs best.

annuity payout options

Let’s say that you are interested in purchasing an annuity but would like to do a bit of research of the different annuity payout options before speaking to a financial advisor or financial professional. Annuity payout distributions are the most commonly misunderstood part of annuities. A basic piece of knowledge is the age at which you may begin to withdraw from your annuity without any penalty charges. That age is 59.5. Prior to age 59.5, you will be paying Uncle Sam a 10% early withdrawal penalty alongside income tax on your investment earnings. Having an idea of the most common annuity payouts and payout schedules is important because it helps you have a better understanding of when and how you will be receiving your income. Here we will discuss the top annuity payout methods and options:

1) Lump Sum Payment

This option allows for you to have access to the full amount of money of your annuity payout. The pros of this is that you do not have to wait for a monthly and possibly fixed payout. You are then free to manage the money as you please. The flipside of this is that you now have a large amount of money at once and may spend it too quickly or it may be mismanaged or invested poorly and you run out of money. Another con is that you have to pay income taxes on the entire investment-gain portion of the annuity.

 

The two most common methods to receive your cash payouts are the systematic withdrawal schedule and the annuitization method. The following two options describe how the systematic withdrawal schedule pays out. With this method, you have total control over the timing of your distributions but have no protection against outliving your annuity assets.

 

SYSTEMATIC WITHDRAWAL

2) Fixed amount

With this payout option, you choose the amount of payment that you want to receive each month and the payments continue until you stop them or you run out of money. The pro to this option is that you are free to select the amount of money you receive monthly. The con to this option is that you will not have a guaranteed income for life.

3) Death benefit

If you pass away prior to your income payments beginning, your beneficiary may receive a death benefit from the insurance company that sold the annuity. Death benefits commonly include the contract value or the premiums paid.

 

ANNUITIZATION METHOD

The second most common method is the annuitization method. This method guarantees you monthly income for a defined period of time.

4) Fixed Period

This annuity payout option allows you to choose a defined period to receive your payouts. For example, 10, 15 or 20 years. Payments will continue post-death and will then go to your chosen beneficiary.

5) Life Only

With this option, the insurance company makes payments for as long as you live. The payment amount is decided by life expectancy. In other words, the longer your life expectancy, the smaller the payment amount. The con to this option is that you are not able to choose your payment amount and there is no guarantee that you will receive the total amount you accumulate. The pro to this option is that you are guaranteed income for life and if you live longer than your life expectancy, you could receive more than the accumulated value of your annuity.

6) Life with Period Certain

This annuity payout option is also known as Guaranteed Term and is similar to Life Only. There is an addition to this annuity payout that you are guaranteed income for a certain period of time. For example, if you choose 10 years but pass away prior to the end of the term you are guaranteed payment of your estate or your beneficiaries will continue to receive payment until the end of those 10 years.

7) Joint and Survivor Life

This annuity payout takes into account your partner or a survivor. The insurance company will pay you or your survivor for as long as either of your lives. The amount of the monthly payments is typically smaller than the Life Only option because the company now has to pay the longer of two lifetimes.

 

Note that not all annuities provide these types of options and may offer different types of annuity payouts. Depending on whether you invest in a fixed annuity or a variable annuity, for example, can change how you receive your annuity payouts. Again, speaking further with a financial professional is recommended to pick an annuity with annuity rider options and retirement payout options that best suits your needs.

 

Get Your FREE Annuities Report Today and Compare Top Annuity Options for You

 

 

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Pros and Cons of Annuities https://www.annuitieshq.com/articles/pros-and-cons-of-annuities/ Tue, 06 Dec 2016 20:17:31 +0000 https://www.annuitieshq.com/?p=25244 Is Using Annuities for Retirement Income Good or Bad? The most important financial goal one can have is to save for a comfortable retirement. Very few Americans have the luxury of retiring with a hefty pension and therefore planning ahead of time is imperative. The only guaranteed retirement income many rely on is Social Security […]

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Is Using Annuities for Retirement Income Good or Bad?

The most important financial goal one can have is to save for a comfortable retirement. Very few Americans have the luxury of retiring with a hefty pension and therefore planning ahead of time is imperative. The only guaranteed retirement income many rely on is Social Security and that may not be enough to pay for your retirement and living expenses. Taking a look at other options to help diversify your income is important and can help give you a better lifestyle.

We will be taking a look at annuities and answering the questions many of you have. Are annuities good or bad? Are annuities a good investment? What are the pros and cons of annuities?

annuity pros and cons

First, let’s identify what annuities are. Annuities are an investment or form of insurance that entitles the investor to a series of annual sums of money. There are numerous types of annuity funds such as fixed, variable, immediate and hybrid annuities which all differ in risks, payouts and benefits. Speaking to a certified financial advisor can help you understand the details on each type. For this article, we will focus on fixed annuities. Fixed annuities have a minimum rate of return that never changes regardless of what happens in the financial markets. You are always guaranteed a stable amount of cash for a set number of years or for life while the insurance company carries the majority of the risk.

You can also add additional benefits known as annuity riders. These act as extra protection for your financial investment at an extra cost. Examples of annuity riders include income riders, nursing home riders and death benefit riders. An income rider guarantees you income for a certain amount of time in which you are able to choose the start date that you will begin to receive your distributions. A nursing home rider helps cover expensive long-term care. A death benefit rider ensures that a family member or beneficiary will be able to collect the remaining principal payment that you invested should you die before receiving the full amount.

 

So what types of pros and cons do annuities carry?are annuities a good investment

Well, I am glad you asked! Let’s review a few to help you understand annuities a bit better. By weighing out the benefits and risks associated with annuities you can make a confident decision whether to invest in them or not.

 

 

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Pro #1: Guaranteed Income for a Set Number of Years or even for Life!

Annuities allow you the option to opt for income for life. For example, if you purchased a $100,000 lifetime fixed annuity with a 8% income rider at age 55 and waited until age 65 to begin receiving distributions, you’d receive a guaranteed $1,000 per month for the remainder of your life. This is preferable to some people who don’t have the time or skill to manage a stock portfolio and do not want to deal with the ups and downs of the market. Peace of mind is a great addition to have during a quality retirement.

Pro #2: Principal Protection

One of the most notable features of fixed annuities is that the value of the annuity will be guaranteed to be at or above the initial amount that you invested. It is guaranteed that you or your beneficiaries will receive back at least what you invested in the annuity. An example of this was seen when discussing the death benefit rider.

Pro #3: Tax Benefits

Any financial growth that occurs with your annuity is tax deferred. What this means is that as your money compounds throughout time, you do not have to pay taxes until you begin to take withdrawals. When you opt for a fixed annuity with an income rider, your payments are part principal and part growth earnings. The principal was put in post-tax so that portion is non-taxable. The only portion that you will owe tax on is the earnings portion of your withdrawals.

Pro #4: Inflation Protection

Annuities give you the ability to customize your investment to your needs. You can customize an annuity to ensure that your annual stream of income keeps pace with inflation. This is critical because inflation can cause an upsetting effect on your assets. The only downside to adding this feature is that it will cost more and can cause your first payments to be lower.

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Con #1: High Costs

Many annuities come attached with a high sales commission or a hefty annual fee. For this reason, it is important to shop around and really study the details of any investment contract prior to purchasing.

Con #2: Lack of Flexibility

Annuities tend to be one of the least flexible investments that are available to retirees. For example, once you purchase an annuity contract your money is tied up and unless you pay a very high fee to retire the money, you do not have access to the lump sum. In the instance of a large unplanned expense, an annuity may not be seen as the best investment choice. For this reason, studying, working with your financial advisor and learning about annuity riders can help with these unforeseen expenses.

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So, are annuities a safe investment? Annuities are a great investment tool that can be customized to your needs and wants during retirement. Doing your homework and speaking with an annuity advisor to review all of the pros and cons can help you with your decision before diving in.

 

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