If the recent market slump has made you nervous about your retirement funds, an annuity can help calm your nerves and protect you from giant market swings if used correctly, some financial advisers say.
This is probably why annuity sales are skyrocketing. Second quarter sales are expected to exceed
Record sales are driven by fixed rate deferred annuities, which are expected to be between
“There’s an almost perfect storm going on right now,” said
Variable and indexed annuities are the other two main types of annuities that make up the bulk of the annuity sales balance. Fixed annuities are considered the safest because you can’t lose the capital, and variable annuities are considered the riskiest because they move in step with the markets. An indexed annuity is considered somewhere in the middle.
What are annuities?
These are contracts with insurance companies to pay you regularly, starting now (immediate) or in the future (deferred). You can buy an annuity for as little as
A lifetime income benefit option “can also be great if you’re worried about outliving your savings, as it can provide you with guaranteed income for the rest of your life, whether you live to be 100 or even 120.”
Some also have a death benefit, so if you die before collecting the annuity, your heirs receive the amount you contributed, plus investment earnings, minus any cash withdrawals you made.
“We often sell annuities to younger clients who have a long-term investment horizon and want to build their retirement savings tax-deferred,” he said. “We also often sell to recent retirees who want to make sure they don’t outlive their savings.”
What are the benefits
a deferred pension?
Deferred annuities, sometimes called “longevity insurance”, ensure that there is enough money to fund late retirement.
They are good for long-term retirement planning because income is not taxed until you start making withdrawals or receive periodic payments, although withdrawals before age 591 /2 may be subject to an additional tax of 10%.
Unlike a 401(k) or an IRA, there are no limits on your annual pension contributions. “If you’re already contributing the most to other retirement plans, like an IRA or 401(k), an annuity can be an attractive option for continuing to save on a tax-deferred basis,” Politzer said.
What are the benefits
an immediate annuity?
With these, you can invest a lump sum in an annuity and start receiving payments immediately to supplement your current income. Plus, you only pay tax on the portion of your immediate annuity payments that is considered income, not on the principal, or the initial deposit made with after-tax money.
What are the three main types of annuities? Once you’ve decided whether you want a deferred or immediate pension, think about what you want from your pension. A fixed annuity guarantees that you will earn a specific rate of interest on your investment and receive a fixed payment.
A variable annuity works similarly to a 401(k), allowing you to choose investments – referred to here as “separate accounts” – that resemble mutual funds. Returns and payouts vary with movements in the financial markets. However, they may offer death benefits, and the payment options that guarantee a lifetime income and expense may be much higher. An indexed annuity is a sort of hybrid of fixed and variable. It is pegged to an index like the S&P 500, offering a guaranteed minimum interest rate (like bonds) and a payout linked to a market index (like stocks). However, losses based on market indices are limited. In return for this security, potential gains are also capped. Between the two, the band in which the annuity can evolve is narrower than that of the market, which means less volatility.
Are there any disadvantages?
For one thing, they can be expensive.
Fixed annuities don’t adjust for inflation, which could erode your return. With a fixed rate, you also risk losing significantly higher rates, as people expect this year if you lock in now.
Insurance companies set a price on them, so you have to take their word for it and trust the company to remain solvent. The state insurance commissions, not the
Are annuities worth it?
“They can all be beneficial if used correctly,”
But like everything else, be sure to read the fine print. Annuities can be complex and include many fees that need to be taken into account.
“Look carefully at what the rules are about them,” Simpson said. “And don’t talk to an insurance company about buying one. Talk to an independent insurance agent and ask if they’re a fiduciary. If they say yes, then go talk to them. The first consultation should only not cost money.”