Annuities are a financial investment option that a consumer can choose as a finance management solution during retirement. When you enter your golden years, an annuity can help to provide consistent income. However, this financial option is certainly not for everyone. If you are debating whether to place your money into an annuity, it is vital to know the advantages and disadvantages of the investment.
These days, there are many ways at looking at investment. Some still like to tuck money away into a savings account for safe keeping. Some take a riskier approach and play the stock market. Others believe investment should be trying to quickly increase the initial money, which could even mean gambling it at a casino. By the way, if you’re in that latter camps, check out this Harrah’s casino promo code… It may be controversial way of thinking about investment, but if you win big you will have made instant profit.
However, one investment opportunity that is often overlook is an annuity.
What is an annuity?
It’s probably best to start with what an annuity is. Normally sold by insurance companies, an annuity is a financial contract between you the client and organization (the insurer). You make a single, or multiple payments, into the annuity to be accessed at maturity of the investment. When it’s time for the money to be paid out, the insurance company will issue the funds.
There are three typical annuities:
- Fixed: Fixed annuities offer a guaranteed return rate set over a specific number of years.
- Variable: Variable annuities provide a choice of investment which could lead to receiving more money on a payout. But because the annuity is not fixed, the investment may lose value depending on the performance of investments.
- Indexed: Indexed annuities earn on the performance of a stock market index. Usually there are some limits placed on how much of the annuity relies on the index and its earning potential.
Pros of an annuity
Retirement Income
A common concern facing people as they enter retirement is whether they have enough money to last them for the remainder of their life. With an annuity, retirees can access a steady stream of income over a previously determined period of time. Importantly, this period can be extended to ensure the consumer does not outlive their money.
Some guarantees
If you opt for a fixed annuity, there is a guarantee on your investment. Fixed annuities allow investors to receive a guaranteed minimum level of interest. Sure, interest rates are not always the best in the annuity market, but they are predictable.
Protection against market volatility
Let’s be clear, any investment you embark on comes with a degree of risk. However, annuities can often be a secure investment opportunity that protect you from volatility in the market. For example, if the market declines once a fixed or indexed annuity is purchased, the value of the investment won’t decline with the market.
Cons of an annuity
Limited access to money
While an annuity will eventually reward you with a fixed income, there are major limitations to accessing your money before the investment reaches maturity. Chief among them is the inability to withdraw money from the investment during what’s called a surrender period. Once the annuity starts paying out, most companies will stop customers from withdrawing money from their account. This essentially means you will only be limited to receiving money that has been previously scheduled.
Fees and penalties
Almost all annuities will have fees and penalties that can affect your investment and income return. Some of the most frequent include:
- Admin fees
- Heavy penalties for withdrawing money during the surrender period
- Fees for optional additions to an annuity
- Variable annuities usually have expanse fees
Tax considerations
Withdrawals, earnings, and payments from an annuity are taxed as normal income. However, this is arguably offset by the fact annuity investments allows interest to grow without taxation.
