Annuities are a great investment vehicle to fuel your retirement years. They are a safer and cheaper way to invest your money than most other investment vehicles. In fact, many annuities have no associated commission or maintenance fees. You have many options when it comes to structuring your annuity, thus making them a flexible investment in addition to their many other advantages.
You can pay for an annuity in a couple ways. Flexible premiums are the easiest, as they allow you to pay a little bit each month, year, or any other period of your choice. Or, if it better suits you, you can buy an annuity with a single premium. There is usually no upward limit here, so if you inherit money or even win the lottery, you can invest it in a single lump sum to fund your annuity. These different methods make funding an annuity much simpler than loading a different type of investment, such as an IRA where there are yearly contribution limits.
When it comes to realizing your retirement goals, your number one priority should be your continued financial safety. After you have set aside money, you need to consider how you want to receive it. You do not want to outlive your money, nor do you want to be forced to change your standard of living. You have worked hard to finally get to the point of retirement and you have saved your entire life to protect yourself. The truth is that a couple poor investments can change your retirement dreams for the worse. Simple bad luck can affect you in serious ways. This is where annuities step in.
The purpose of an annuity is to reduce the element that luck might have on your retirement. Annuities come with many built in safety measures that can allow you to live out the dream that you have made for yourself. Besides the standard safety measures provided for by the insurance company, you can use your annuity to fulfill many needs. If you are worried about outliving your cash supply, you can opt to get a straight life policy. This is the most basic form of annuity distribution and will provide you with a steady stream of income—even if you live longer than your initial deposit plus interest will carry on for. Other types of distribution options can be structured to pay a spouse or beneficiaries after you pass away. In other words, regardless of your purpose for buying an annuity, you can find a type of distribution that will most benefit you and your loved ones.
Additionally, an annuity is credited tax-deferred interest, making it a superior investment to mutual funds where you are required to pay taxes on what you earn on a yearly basis. In this light, you can see annuities gaining interest in a three-pronged manner: the original amount that you put in plus any subsequent deposits, the interest that you have already compounded, and the amount of your earnings that would otherwise go toward taxes. This allows annuities to grow at a faster rate than a mutual fund with the same stipulations would.
Annuities, despite being an insurance product, are a surprisingly easy way to diversify your portfolio. You can use a variable annuity to give you high risk/high reward assets, an equity indexed annuity to give you protection against inflation, and a fixed annuity to make sure you will have at least some growth of your funds month after month. Having multiple annuities within your portfolio can be a great benefit, as you can see.
To get the most out of your investing, annuities should at least comprise a portion of your overall investment portfolio. They are a unique way to preserve cash and fund retirement. And because they are technically an insurance product, you can even use them to pass on cash to a beneficiary in a way that you cannot with other investments. IRAs and 401(k) investments all are taxable under the capital gains tax law. Only the accredited interest is taxable when a beneficiary begins receiving the deceased’s annuity funds.
Finally, annuity benefits avoid probate. When an annuity owner passes away, their estate will be locked in probate until all of the issues are accounted for. Annuities are an insurance product, and therefore will go to the beneficiary once the insurance company receives and processes the death certificate. Like life insurance, annuities that are passed down avoid this lengthy process.
See our article about Amortization.