Buy Annuity: The How To Guide
Some financial planners and investment brokers discourage their clients from considering annuities, arguing they are too complex, cumbersome, and conservative. They especially caution that interest penalties and fees for early withdrawal may negate the entire annuity’s growth. Although some of these concerns are sound, a well-balanced retirement portfolio should include annuities. Judged in a vacuum, a fixed annuity’s early withdrawal fee seems harsh. But, compared to a CD, a fixed annuity’s withdrawal limits are actually much more favorable. The same can be said of variable annuities and mutual funds.
Experienced financial planners encourage their clients to buy annuities a part of a well-rounded retirement plan. Admittedly not the investment most likely to generate rapid growth, an annuity serves a different purpose: to protect assets against severe market fluctuations, safeguard wealth, and assure a steady source of income throughout your lifetime.
Bottom line: annuities are powerful wealth management tools that belong in your retirement plan. The following are some tips for how to buy an annuity.
A Diversified Retirement Plan
All financial advisors agree that you must diversify your investments. Buy some stocks, bonds, or mutual funds for their rapid-growth potential. Especially as a down market begins showing signs of recovery, you should follow the time-honored rule – buy low and hold. As you buy high-risk investments, balance out your portfolio with secure instruments. CDs, treasuries, US-backed bonds, and fixed or index annuities are all popular options. In addition to these, you should open a tax-sheltered or tax-deferred retirement account – an IRA, a 401(k), or a secure pension plan.
And you also should buy annuities. You must secure your retirement with annuities. With all three kinds of investments working for you, you cover the scale from most conservative to most aggressive, and more than adequately provide for your own safety. A well-chosen annuity is an insurance product sold by a solid company and back by a huge asset pool. Although annuities are low growth compared to traditional equities, their security, death benefits, and tax bonuses make them a smart retirement planning instrument.
Choosing Among Three Annuity Types
You have a choice among three different kinds of annuities:
Fixed annuities offer a set rate of return; the annuity contract specifies the rate at which your money will grow and how interest will compound over the “payment period.” Expect to see approximately 3-8% annual yield from these products. Fixed annuities also establish how the company will disburse your earnings as steady income during the “payoff period.”
Variable annuities' return is based on the performance of investments in the annuity's portfolio. With a variable annuity, your growth will depend on market performance. The insurance company doesn’t offer any protection against loss of principle if the chosen equities start performing poorly, but on the upside, you get to keep all the profits if they perform well. Variable annuities are most similar to traditional mutual funds, with average rates of return ranging from 5%-12%.
Equity-indexed annuities combine the advantages of the other two: The annuity guarantees a minimum fixed rate of return, and it adds a variable rate based on the return of a stock index. Approximately 90% of equity-indexed annuities tie the variable rates to the Standard and Poors’ 500 Index.
Don't Just Shop, Implement a Solid Retirement Strategy
Purchasing an annuity is a big decision. Online research is a good start, but prudent investors should discuss all their options and risks with an independent financial advisor. Request a free, no-obligation consultation today, along with a report of current rates on brand-name annuities.Speak with an advisor over the phone about annuities for FREE.
Annuities and Your Investment Objectives
If you already have other retirement investments – especially a 401(k) invested in stocks or mutual funds – an annuity complements your investment with security provisions. A fixed annuity is a good candidate to meet these needs, providing steady, conservative growth to balance out the volatility in your 401(k). If you have a secure company pension and feel willing to risk a little of your earnings, a variable annuity represents your best choice. Both the pension and the annuity guarantee your retirement income, but the variable annuity will build value more quickly than the pension – a good balance of safety and risk. And if you have no retirement plan, or can’t decided between fixed and variable, then the equity-indexed annuity stands out as by far your best choice, making liberal allowance for great growth yet assuring you risk no loss.
Annuity Fine Print
As you decide to buy an annuity, collaborate with your financial advisor, scrutinizing the fine print. Buy annuities that will not penalize you for early withdrawal. Buy annuities that offer the highest interest rate and deliver the highest monthly payment. Be aware that annuities offer choices about when the payouts may begin; and the older you are when you begin collecting, the more you collect each month. If you plan on continuing work after your “official” retirement – like consulting, freelancing, or something entrepreneurial – you may elect to defer the annuity’s payment until you reach 70 or even 80. This is a smart way of prolonging tax-deferral and growing your money even faster. As you make up your mind to buy an annuity, no matter which annuity you choose, consult a trustworthy financial advisor and compare annuity contracts across multiple carriers.
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