What Are Annuities?
Annuities, at their core, are simple financial instruments: you give me a chunk of your savings and I send you a monthly payment for the rest of your life, no matter how long you live. In practice, this arrangement gets fleshed out in various ways. The most common scenario is when retirees see that their savings aren't sufficient to last through all of retirement, and make an upfront payment to a life insurance company in exchange for a promise of life-long monthly income. This arrangement is beneficial to both parties; retirees gain the peace of mind that they won't outlive their savings and insurance companies make a profit off retirees who live shorter than expected.
Fixed Annuities
An investment in fixed-interest instruments like CDs, bonds, mortgages, and various others debt-investments gives rise to the fixed annuity. A fixed annuity most-resembles a CD in that it guarantees a fixed-interest rate up front. The fixed annuity contract specifies an interest rate that funds will earn for every year they're held by the insurance company. The fixed annuity is perfect for conservative investors because it has virtually no risk of capital loss, short of a total company collapse.
Variable Annuities
Alternatively, an investment can be made in equities-based instruments and commodities, which gives rise to the variable annuity. A variable annuity most-resembles a 401k in that the account balance fluctuates with the ebb and flow of the markets. The insurance company doesn't promise a fixed rate of return, but over the long run, equities tend to out-perform debt-based instruments, making variable annuities appealing to more aggressive investors.
Indexed Annuities
The final alternative to how annuity income gets generated is called the indexed annuity. An indexed annuity works by investing money in an equities index, like the S&P 500, but with protection against capital loss. Essentially, the insurance company caps earnings during high-growth up markets in exchange for covering investors against any losses during down markets. Indexed annuities fall somewhere in between fixed and variable annuities in terms of its risk profile and average rate of return.
Why Would Anyone Want to Buy an Annuity?
Annuities serve a unique role in the retirement planning process, making them distinct from instruments like CDs, bonds, 401(k)s, and IRAs. Annuities offer a guaranteed minimum lifelong income that cannot be outlived. No other investment vehicle can make this promise.
Think about this: according to a recent study by the Center for Retirement Research, the average 401(k) account of 60-62 year olds in America holds only 25% of the income needed to maintain their standard of living at retirement.
Social security attempts to bridge this gap, but only covers about 45%. What about pensions? According to the Federal Reserve study, even if you're one of the lucky Americans to have received a pension (seldom available to younger generations), you're still likely to face a retirement income gap. Simply put, at retirement, you'll need 85% of your current income to maintain the same standard of living, but with 401(k) + social security + pension, you'll still be coming up short.
Annuity Benefits and Downsides
Like any investment vehicle, annuities have their pros and cons. The single most attractive feature of annuities is their relative security and the option of lifelong income. That said, there not all retirees will find annuities suitable for them. Some annuity types are better than others, but in general, whether any annuity is a suitable tool in your retirement planning arsenal will depend on your particular financial profile. Consider the following benefits and downsides of annuity investment:
Benefits
Today, most insurance companies offer custom-tailored annuities for every imaginable financial situation. Sure, everyone is looking to retire comfortably at age 65, but everyone's finances are also unique. Are you married, widowed, or divorced? What is your investment risk-tolerance? How diversified is your retirement savings? Do you own your own home? Do you run your own business? Answers to these questions ultimately determine which annuity is best for you. We will research and analyze every top-rated carrier for the best possible annuity that suits your needs, not ours.
Annuities, at their core, are simple financial instruments: you give me a chunk of your savings and I send you a monthly payment for the rest of your life, no matter how long you live. In practice, this arrangement gets fleshed out in various ways. The most common scenario is when retirees see that their savings aren't sufficient to last through all of retirement, and make an upfront payment to a life insurance company in exchange for a promise of life-long monthly income. This arrangement is beneficial to both parties; retirees gain the peace of mind that they won't outlive their savings and insurance companies make a profit off retirees who live shorter than expected.
Fixed Annuities
An investment in fixed-interest instruments like CDs, bonds, mortgages, and various others debt-investments gives rise to the fixed annuity. A fixed annuity most-resembles a CD in that it guarantees a fixed-interest rate up front. The fixed annuity contract specifies an interest rate that funds will earn for every year they're held by the insurance company. The fixed annuity is perfect for conservative investors because it has virtually no risk of capital loss, short of a total company collapse.
Variable Annuities
Alternatively, an investment can be made in equities-based instruments and commodities, which gives rise to the variable annuity. A variable annuity most-resembles a 401k in that the account balance fluctuates with the ebb and flow of the markets. The insurance company doesn't promise a fixed rate of return, but over the long run, equities tend to out-perform debt-based instruments, making variable annuities appealing to more aggressive investors.
Indexed Annuities
The final alternative to how annuity income gets generated is called the indexed annuity. An indexed annuity works by investing money in an equities index, like the S&P 500, but with protection against capital loss. Essentially, the insurance company caps earnings during high-growth up markets in exchange for covering investors against any losses during down markets. Indexed annuities fall somewhere in between fixed and variable annuities in terms of its risk profile and average rate of return.
Why Would Anyone Want to Buy an Annuity?
Annuities serve a unique role in the retirement planning process, making them distinct from instruments like CDs, bonds, 401(k)s, and IRAs. Annuities offer a guaranteed minimum lifelong income that cannot be outlived. No other investment vehicle can make this promise.
Think about this: according to a recent study by the Center for Retirement Research, the average 401(k) account of 60-62 year olds in America holds only 25% of the income needed to maintain their standard of living at retirement.
Social security attempts to bridge this gap, but only covers about 45%. What about pensions? According to the Federal Reserve study, even if you're one of the lucky Americans to have received a pension (seldom available to younger generations), you're still likely to face a retirement income gap. Simply put, at retirement, you'll need 85% of your current income to maintain the same standard of living, but with 401(k) + social security + pension, you'll still be coming up short.
Annuity Benefits and Downsides
Like any investment vehicle, annuities have their pros and cons. The single most attractive feature of annuities is their relative security and the option of lifelong income. That said, there not all retirees will find annuities suitable for them. Some annuity types are better than others, but in general, whether any annuity is a suitable tool in your retirement planning arsenal will depend on your particular financial profile. Consider the following benefits and downsides of annuity investment:
Benefits
- Lifetime Income Stream
- Tax-deferred Growth
- Competitive Fixed Interest Rates
- Protection Against Market Downturns
- Death Benefit Options
- Access to a Portion of Your Money Downsides
- Administration Fees
- Early Withdrawal Fees
- Taxed as Ordinary Income
- Opportunity Cost of Locking In a Low Fixed Rate
Today, most insurance companies offer custom-tailored annuities for every imaginable financial situation. Sure, everyone is looking to retire comfortably at age 65, but everyone's finances are also unique. Are you married, widowed, or divorced? What is your investment risk-tolerance? How diversified is your retirement savings? Do you own your own home? Do you run your own business? Answers to these questions ultimately determine which annuity is best for you. We will research and analyze every top-rated carrier for the best possible annuity that suits your needs, not ours.
