- June 14, 2022
- Posted by: Demetris Curry
- Categories: Annuity, Blog
Should you buy an annuity? It depends on your personal investment objectives, the amount you have to invest, your tolerance for risk and most importantly — time horizon.
The only real way to decide if an annuity is a good choice for you is to have a plan. Your plan should dictate what your money goals are and should lead you to make choices that will help you meet those goals. If you want to ensure the outcome of how you invest your money, at least in part, an annuity could be a good choice.
Are annuities good investments?
An annuity is an insurance product. That means you buy it to reduce some of the risks that come with investing money. If you’re investing for the long term, annuities can be a great way to guarantee a steady stream of income and avoid market volatility. They’re also a good way to make sure your money lasts for many decades—you can’t outlive your assets if they’re guaranteed by an insurance company! However, if you plan on withdrawing your investment principal at any point in the future (or even just want access to it), annuities may not be right for you.
What are the pros and cons of an annuity?
Annuities are an excellent long-term investment. If you’re looking for a stable source of income, annuities will give you that and more. However, they are also high-risk investments that can lead to significant losses if not used properly. You should carefully weigh the pros and cons of annuities before making your decision about whether or not to purchase one.
- They offer guaranteed lifetime income streams—you’ll never outlive your money with an annuity!
- There are no taxes on the gains within the contract (assuming it meets certain requirements).
Annuities provide tax-deferred growth.
You might think that because an annuity is a tax-deferred investment, you don’t have to pay taxes on the growth of your money. But this isn’t correct: Annuities are not tax-free or even tax-deferred. They’re just sheltered from taxes until you start withdrawing from them after age 59 1/2 (or earlier if you meet certain requirements). This can be a nice advantage for those who want their investments to grow without having to worry about capital gains and income taxes until later in life, when they’ll likely be in a higher bracket than during their working years.
Annuities are complex and can be costly.
You should also know that annuities are complicated. They require you to understand their fees, surrender charges, fees on dividends, fees on interest gains and capital gains taxes before you invest your money. This can make it tricky to figure out whether an annuity is worth the risk or not. If you decide to go through with it anyway, make sure you’re ready for these costs as well as the potential pitfalls of investing in an annuity product:
- Purchasing costs: There’s no way around this one—if you buy an annuity product from a financial firm or insurance company (which most people do), there will be some sort of cost associated with purchasing the policy itself (and in many cases those fees are very large). In fact, according to data from the Securities and Exchange Commission (SEC), a whopping 82% of all annuity sales involve high-cost products like variable-rate indexed savings bonds that charge annual fees between 10% and 20%. You may also see other kinds of additional charges added onto your bill such as administrative expenses or even mortality & expense guarantees which help protect against unexpected losses in value due changes
Fixed, variable and indexed annuities can supplement retirement income.
Annuities can be a good investment — or they can be a supplement to your retirement income.
- Fixed annuities pay a set amount each year, regardless of the market’s performance. These payments are usually guaranteed for life, so if you choose this type of annuity and then pass away before the money runs out, your heirs will still receive the benefits owed them.
- Variable annuities have fluctuating rates of return that depend on how well investments perform in the market over time.
- Indexed annuities have rates of return that are tied to some index (like gold or oil prices), which means they may increase by more than other financial products but could also decrease in value if those indices go down significantly during any given period.
There are many types of annuities to consider.
A variable annuity is a contract between you and an insurance company. You deposit money into the contract, which then buys mutual funds that are held in the variable annuity. The returns on your investment are based on how well those funds perform over time.
An indexed annuity is similar to a variable annuity but with lower risk because it guarantees a minimum rate of return until you reach retirement age. This is done by using a market index such as the S&P 500 or Dow Jones Industrial Average (DJIA). If these markets go up, so does your account balance even if there’s no growth from its underlying investments—meaning you could earn more than what’s possible with standard mutual funds!
It’s important to understand that the longer your time horizon, the more likely it is that an annuity will be beneficial for you. For example, if a 65-year-old investor with $1 million to invest in 30 years wants to invest their money in an annuity providing a guaranteed income stream and no risk of loss over 30 years their options are quite limited. They can buy an immediate annuity or try and take advantage of some kind of hybrid product (e.g., fixed index products).
On the other hand, someone with a shorter time horizon might think about using an immediate payment option like single premium deferred annuities or flexible income riders on life insurance policies. These products may provide some flexibility but they generally don’t offer long-term premium protection or long-term care options which are crucial factors when looking at purchasing either type of product because without these factors you could end up outliving your assets resulting in insolvency should something happen along the way like health issues etc.”
We understand that annuities can be complicated and confusing–but they also offer a lot of benefits. If you’re thinking about annuities, schedule a consultation with us. We’ll help you find out if it’s right for you by analyzing your personal goals and investing timeline.
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