Many Americans wonder how to best invest their money for the long-term. Annuity insurance is one option consider, an arrangement in which an investor makes an upfront, or ongoing payments, and in return receives return payments of principal and interest for their retirement. Return payments can be for a period of time or for the life of the investor.
Annuity insurance can provide many benefits including unlimited contributions to a tax-deferred income stream. Annuity payments give retirees structure, and a beneficial way to plan their spending, and ensure money for life.
There are three main types of annuities: fixed, variable, and indexed. Here we will focus on the safest, and most common type; fixed annuities. A fixed annuity ensures a standard rate of interest on your investment for a stipulated period irrespective of fluctuations in the economic status of the marketplace.
A fixed annuity is a widely preferred option among investors due to its protection of principal and security for retirement. There is a guaranteed return of both earnings and the principal. As well, fixed annuities can provide a higher rate of return than other common “safe investments” such as Bank CD’s or Government Bonds.
There are two kinds of fixed annuities. An Immediate fixed annuity, which implies that the investor starts receiving payments immediately or within a very short period after the principal is deposited. This is commonplace for retirees, as US annuity investors are not able to receive payments (without tax penalty) until the age of 59.5 years old.
For annuity investors younger than 59 and a half, only one payment schedule option exists, a deferred annuity. A deferred annuity has a period until maturity (when payments occur). During this time a fixed annuity grows at the pre-agreed fixed rate of interest, and no tax is paid until withdrawals are made.
As with all insurance and investment products, there are various drawbacks. When considering a fixed annuity, or really any investment, always ensure you’re getting both sides of the story. One concern with annuities is that they are not a very liquid investment. If you invest in an annuity and then require the money be returned before maturity, you face an IRS tax penalty, as well as possible penalties from your insurance company. Always consider your financial position and possible short-term needs, before investing in a long-term fixed annuity.
A fixed annuity can be right for many people’s retirement, however, it’s not right for everyone. Always consider all the implications before making a major long-term financial decision.
John C. Ryan authors articles about annuity insurance, providing retirees with the knowledge they need to assess their fixed, variable, and index annuity options.
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