It is never too late, or too early, to start planning for retirement. Annuities are a popular option with many advantages. You can put away larger amounts of cash, and growth is tax-free until you withdraw the funds. As an investment vehicle, annuities may seem confusing at first. The following is a basic guide to annuities for beginners.
What Are Annuities?
Annuities are a relatively safe investment that promises steady returns. They are regulated by state insurance commissions and by the Securities and Exchange Commission (SEC).
Annuities can be defined as contracts made with insurance companies, mainly for retirement planning. They are a long-term investment strategy, designed to guarantee income later in life. You invest in an annuity either in a lump sum or by making payments over time. In exchange, the insurance company contracts to make a series of payments to you, beginning at an established future date. Annuity income may be paid out for a certain period of time or for the remainder of your life.
Are There Different Types of Annuities?
Individuals planning for retirement have three main types of annuities to choose from, each with its own pros and cons.
Fixed Annuities
A buyer makes periodic payments to an insurance company on a fixed annuity. The interest rate on the funds is determined in advance. When it is time for payouts to begin, the buyer receives the funds plus interest. Payouts may begin right away with immediate fixed-income annuities, or they may be deferred until a set date months or years in the future, and continue to grow through interest, with deferred income annuities.
Variable Annuities
Buyers decide where they want their money invested with variable annuities, typically in mutual funds. This requires some investment knowledge on the part of the buyer. Future payouts will depend on the performance of the investments. Variable annuities offer the possibility of higher payouts, but there is some risk involved. You should also be aware that administrative fees, fund expense fees, and certain other fees will be deducted from your account. Variable annuities are regulated by the SEC.
Indexed Annuities
This option offers the freedom of variable annuities along with the security of fixed annuities. Interest is based on the performance of the market index. This is usually the S&P 500 Index (a stock market index that measures the performance of 500 large companies on the U.S. stock exchanges). If the market performs well, indexed annuities can offer higher returns, although not typically as high as variable annuities. They are regulated by state insurance commissions and offer minimum guaranteed rates (usually between 1% and 3%) as protection against market downturns.
Are There Penalties for Early Sale or Withdrawal?
You can purchase annuities from mutual fund companies, brokerage firms, and some banks, as well as from insurance companies. If you sell your annuity or withdraw funds before the payout period begins, you will have to pay surrender charges. This could significantly reduce the value of your investment. Speak with our experienced agent for professional advice on buying and selling annuities.