Where should you invest your money? As you get closer to retirement, you may not have as much time to accumulate wealth. An annuity may be ideal for you.
What is an annuity?
An annuity is a long term agreement between you and an insurance company in which you make either a lump sum or series of payments and in return obtain regular disbursements at some point in the future. The goal of an annuity is to provide a steady stream of income during your retirement years.
Why Annuities?
There are several benefits to having an annuity. A major benefit is that they allow your money to grow on a tax-deferred basis.
An annuity is a long-term investment designed to help you avoid the risk of outliving your income. In other words, through what is called, annuitization, your contributions are converted into periodic payments for a specified term, or for a lifetime.
An annuity is perfect for those who have a low-risk tolerance.
Types of Annuities
- Immediate Annuity – provides a guaranteed income right away. This type of annuity involves making a lump sum payment to an insurance company in exchange for the right to receive payments from the insurer on a regular basis beginning immediately. This type of annuity is interest-rate sensitive. In other words, if interest rates are low, your payout may be smaller. Regardless of interest rate, it does guarantee a stream of income for as long as you live and can be extremely helpful.
- Deferred Income Annuity — provides a specified interest rate for a specified period of time. This deferred annuity is a single premium fixed rate annuity. You make one lump-sum investment, decide when you want it to payout and you’ll know what you will receive and when. These annuities are tax-deferred and interest rates can be higher than rates on CDs and other popular investments.
Some use these as a longevity risk to provide supplemental income when it is most needed. These annuities are interest-rate sensitive, but generally, because of the wait, payouts are considerably higher.
- Fixed Index Annuity – Earn interest based off a crediting formula linked to a stock market index, typically the S&P 500 or Dow Jones Industrial Average.
A fixed index annuity guarantees the principal invested will not go down in value yet offers potential for growth if the stock market does well. It is designed to be a long term investment that grows over time to provide a stream of income after retirement.
Important Factors to Consider
Tax Penalties – If you withdraw money before the age of 59 ½ you may incur tax penalties.
Contract Term – This is an agreement between you and your insurance company for a minimum specified term. You may lose principle of you don’t adhere to the term of the agreement.
Timing is Everything – If you wait to annuitize your funds beyond age 65, your monthly payout will be higher. When your annuity is set up, it is based on your life expectancy and when you start to receive payments. If you wait a few years longer, based on the same life expectancy, fewer payments will be made, thus the installments increase. Because the agreement is with your insurance company, this amount is guaranteed for the rest of your life, even if it is longer than charted originally.
You Can’t Go Backwards – the interest rate is determined on an annual basis and interest earned is locked in. Your account only grows; it can never go backwards, even in a bear market.
Speak with a Professional – there are a lot of options and terms you may not be familiar with such as caps, fees, and participation rates. A qualified professional, like Linda Copozzoli, of LC Insurance and Financial, LLC, understands these terms and how they can affect you. She will put her experience and passion to work for you to determine the annuity that will work best for you.
