Why You Should Consider Annuities
Planning for retirement starts at an early age. You can get started by determining retirement goals and choosing your investments. The earlier you start with retirement planning, the better.
If you’re looking for a stable income stream during retirement, the best option is an annuity. It is a customizable contract between an individual and an insurance company. The insurance company will convert the premiums into lifetime income sources.
The primary benefits of buying an annuity include principal protection and deferral of taxes. With an annuity, all the money you invest compounds without taxes. In this blog, we will discuss everything you need to know about annuities.
What Is an Annuity?
Annuities are tax-deferred vehicles backed by an insurance company. Most annuities are optimized for long-term growth, which makes them ideal for retirement.
While annuities are less risky than stocks and bonds, they still carry some form of trade-offs like mortality risk. If the investor dies too soon, they will not maximize the benefits of annuities.
Other than this drawback, an annuity is a good financial instrument. It can be customized by adding features to fit the client’s needs. Consider the following factors when customizing an annuity:
- How long do you think you’ll live?
- When do you want your payments to start?
- Do you want additional riders like death benefits or inflation protection?
- Do you want a lump sum payment or monthly income payments?
Different Types of Annuities
When it comes to annuities, it’s easy to add features that best suit your needs and financial goals. Annuities usually come in three varieties: fixed, variable, and equity index. Let’s discuss each of them:
Fixed Annuities
A fixed annuity allows you to secure an income for retirement, which is unaffected by market fluctuations. When you buy a fixed annuity, you’ll get a fixed rate of return on your contributions. The insurance company will determine the minimum interest rate on your investment.
Predictable investment returns and tax-deferred growth are the main pros of fixed annuities. If you’re looking for a consistent income stream during your retirement, fixed annuities are the right option.
Variable Annuities
With a variable annuity, your money is invested in stocks, bonds, and other sub-accounts. As the name suggests, there’s no consistent pattern when it comes to the value of your investment.
Your future income stream may rise and fall depending on the performance of your sub-accounts. Although variable annuities can offer higher returns and tax-deferred growth, it’s riskier than fixed annuities.
Indexed Annuities
Equity-Index annuities pay an interest rate depending on the performance of a market index like the S&P 500 and the Nasdaq 100. If the financial market performs well, your annuity will earn higher yields. In the event that the market underperforms, a minimum interest rate is guaranteed. This way, you will not lose your principal investment. Indexed annuities are less risky because you won’t be investing directly in the stock market.
Pros of Annuities
An annuity is a good way to grow your funds and diversify your portfolio. Here are some of the benefits of annuities for your future:
- You will receive regular payments during retirement
- Your retirement savings can be maximized
- The growth of your annuity is tax-deferred
- You can choose your own investment option for variable annuities
- You’ll only pay taxes once you start receiving payments
- Death benefits can be claimed by your beneficiaries
- It can be used to supplement Social Security and pension plans
Annuities can be used as part of your estate planning strategy
While it’s true that annuities have many benefits, they also come with risks and drawbacks. Some of its disadvantages are no liquidity, expensive administrative fees, and higher taxes for beneficiaries. Always evaluate your risk tolerance and retirement goals when buying annuities.
Conclusion
Planning for a secure future is something that we all want. If you need help in understanding complex financial products like annuities, count on none other than
Local Retirement Group. We help our clients achieve long-term financial stability through a wide range of insurance and annuity options.
As a local insurance agency, we specialize in life insurance, health insurance, Medicare, final expense, and more. With our experience and industry expertise, we’ll assist you in making an informed decision. Our team of agents is here to guide you every step of the way. Don’t hesitate to get in touch with us for more details.
