Is an Annuity For Me

The best age at which to purchase deferred annuities will vary for each annuity investor, but financial advisors generally agree that between 45 and 55 is optimal. Combined with other retirement investments, the compounded tax-deferred earned and the guarantee of a lifetime income stream can typically provide a sizable retirement income.

A typical annuity investor is able to incur more risk with investments between the ages of 45 and 55 than after age 55. After age 55, there is less time to make up for losses. He or she can also choose among a number of annuity options suited for his or her financial goals and risk tolerance. Past age 59 ½, most annuity investors purchase immediate annuities to provide guaranteed monthly income. While older annuity investors have the same choices as younger investors, the shortened time frame makes certain options better than others.

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Is an Annuity for Me if I'm Concerned about Market Risk?

An annuity investor has three choices when it comes to choosing an annuity: Fixed, variable and indexed. His or her choice should be based on how old he or she is at the time of purchase and his or her risk tolerance.

Fixed Annuities

A fixed annuity is most suitable for older investors who have fewer years to save for retirement and prefer to take fewer risks. Risk aversion means that the investor doesn't want to risk money in the stock market, or it means that his or her retirement portfolio contains additional investments that carry risk. Fixed annuities pay a guaranteed amount, as both the rate of return prior to payouts beginning and as the monthly income once they do begin. A return of 3% to 10% is common, depending on the insurance company and the type of annuity.

Because fixed annuities are almost always purchased with a lump-sum premium, an investor can buy as many fixed annuities in any amount that suits his or her needs. This is ideal for those receiving the proceeds from equities, bonds, the sale of a house or for those who have received a large inheritance.

Variable Annuities

Investors who opt for variable annuities are opting to be invested in the stock market. The premiums paid to the insurance company are placed in a special account that invests in stock, bond or money market funds, or in a combination of all three. Investors can choose among aggressive, moderate or conservative funds. Gains are not guaranteed, but can beat those of fixed annuities.

Variable annuities are a good choice for investors on the verge of retirement who need to make up for a retirement savings shortfall. Even if the risk of variable annuities is greater than that of fixed annuities, investors can minimize risks by choosing diverse funds and investments. For those investors who won't be retiring for several years, aggressive growth can be achieved quickly through compounded earnings.

Unlike the monthly payout of fixed annuities, the payouts of variable annuities can fluctuate based on the performance of the underlying funds within the annuity. An investor interested in a variable annuity is always advised to make sure he or she has additional assets and access to liquid cash for unanticipated monthly expenses. The returns of a variable annuity can be greater than those of a fixed annuity, but so can the risks.

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.

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Indexed Annuities

Indexed annuities are a hybrid of fixed and variable annuities. They are tied to the performance of a particular market, typically the Standard and Poor’s 500. The returns are capped on the upside but contained on the downside. In other words, if the upside cap is 5%, an investor will earn 5% even if the S&P 500 increases by 6%. If the downside limit is 2%, the investor will earn 2% even if the S&P 500 loses 3%.

One big advantage of indexed annuities is that the principle is not at risk. No matter how drastic the index decline, the risk is limited to the amount of interest earned. This is a good scenario for the investor who wishes to have limited participation in the equities market without taking on exceptional risk.

Annuity for Guaranteed Income?

As life expectancy increases, we run the risk of outliving our savings. Historically, while the stock market does present the risk of loss over certain, shorter periods of time, it out-performs all other investment options in the long run. Financial advisors and actuaries understand that the longer an investor lives, the longer he or she is likely to stay alive. In other words, while the life expectancy of the average American man is now 78 years, a man in the US who reaches age 78 is likely to live to be 85.

A retirement savings account must perform two essential tasks: The money in it must last at least as long as the person who owns it and the account must grow at least at a rate that is greater than inflation. Along with outliving his or her assets, the greatest risk to an investor is inflation. Some investors also need to ensure that their surviving spouse is guaranteed lifetime income following his or her own death. The original annuitant might want to make sure that a permanent or term life insurance option that provides a death benefit to the spouse is available. And, a cost of living adjustment (COLA) may be needed as an additional hedge against inflation.

All of the above options are available with the three kinds of annuities listed above. The annuity best suited for an individual investor will be the one that meets most of his or her financial needs while accounting for the level of risk tolerance and his or her ability to manage investments. No one annuity or financial investment will meet each and every one of an investor’s financial goals. Investors are always advised to review the prospectus and contract to make sure it matches his or her needs.

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