Many investors lost a great deal of money in the recent recession, and some, unfortunately, saw their retirement portfolios dwindle to almost nothing. Many who are at or near retirement age are looking to rebuild through safer investments. Now, there are number of ways in which you can ensure the safety of your investments. You can park your money under the mattress, put it in money market fund or invest in US bonds. One of the investment vehicles that has gained popularity in the recent past is annuities. But are annuities the answer? Many investors are still somewhat uncertain about what annuities are and if annuities are the answer to the safety of retirement savings. To clear the confusion here is a simple guide to annuity.
Not All Annuities Created Equal
All annuities involve a contract between an insurance company and an investor, with the investor making one lump sum payment or a series of payments to the insurance company in exchange for some form of monthly payout during retirement. Deferred annuities are long-term investments usually purchased by individuals who are not nearing retirement age; funds from these cannot be removed without penalty before age 59 ½. Like 401(k) contributions, they are tax-deferred unless withdrawn early.
Some types of annuities, such as variable and indexed options, have been criticized for their tendency to be plagued by overwhelming complexity and hidden expenses as well as for their reputation for being pushed by less-than-scrupulous salespeople. These factors, along with a relatively low return compared to other options, have caused some retirement planners to write off these investments as options for their portfolios.
Advantages of Single-Premium Immediate Annuities
Not all types of annuities are inherently problematic, however. The ultimate goal of retirement planning is to ensure a steady and reliable stream of income sufficient to meet one’s needs for the entire duration of the retirement years. Annuities have one big advantage over other, potentially more lucrative investment options: predictability.
This benefit was illustrated during the 2009 market crash, when many investors watched their portfolios dwindle – albeit temporarily, for some – to a fraction of their previous values. Those who had chosen to purchase annuities continued to enjoy consistent payments. For some, this meant the difference between being able to continue comfortably in retirement, and having to scramble for additional sources of income.
Immediate annuities are attractive to those already in retirement because – as their name suggests – they begin to pay out immediately and for a period of time determined when you buy them. You can choose to continue receiving payments for a set term, such as 20 years, or for the rest of your life; the longer the term of the payments, the smaller the amount of each check. Single-premium immediate annuities are simple and straightforward, with no variability or hidden fees.
This investment essentially works like a life insurance policy in reverse. Within a diversified portfolio, it can provide a measure of stability that acts as a safety net during your retirement years, assuring your financial security and peace of mind.
