The Best Brand Name Annuity Rates, Period! See Which Annuity Is Right for Me? Annuity Definition: a contract are annuities a good investment for retirement an individual and an insurance company promising lifelong income in exchange for an upfront payment.
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. Annuities Explained by Type As always, the devil is in the details. What type of annuities exist and how do they actually work? There a several fundamental types of annuities geared to different retirement planning stages. Deferred annuities are used to generate savings.
Immediate annuities are used to extend the purchasing power of an existing nestegg. Immediate annuities work like CDs, where a large chunk of one’s retirement savings is given to a life insurance company in exchange for a life-long stream of monthly payments. The key difference between CDs and immediate annuities, is that the annuity pays a higher interest rate and guarantees a stream of income that cannot be outlived, which is ideal for retirees. Three Other Types of Annuities Beyond the funding distinction that separates deferred from immediate annuities, there is also the different ways annuities generate income. Fixed Annuities: interest earned from debt instruments like CDs, bonds, and mortgages. Variable Annuities: interest earned from equity instruments like stocks and commodities.
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. 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. Indexed Annuities The final alternative to how annuity income gets generated is called the indexed annuity.
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. Why Would Anyone Want to Buy an Annuity? Annuities offer a guaranteed minimum lifelong income that cannot be outlived.
No other investment vehicle can make this promise. Given these bleak national averages, forward-thinking retirees who don’t want to lower their standard of living are relying on annuities to bridge the gap. A comfortable retirement may seem like a right, but in today’s global economy it is not a given that 40 years of hard work ensure a retirement at all. In fact, this is not the case for most Americans.
Unfortunately, this is not the end of the story. Over the last fifty years, the average life expectancy of Americans has increased noticeably due to advances in medical technology and lifestyle changes. While generally welcomed news, this now means that Americans have to stretch their savings through 30 years of retirement. 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. How Annuities Work We’ve done a pretty good job of summarizing the fundamentals of how annuities work, but in practice, annuity contracts can be tricky to analyze alone. 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? Fixed Annuity Guide or Immediate Annuity Guide Click Here for everything you need to get started in fixed annuities! Fixed Annuity Features — Check out some common features of fixed annuities and how they can benefit you. Fixed Annuity Performance — What sort of results can you expect?