Many Americans wonder how to best invest their money for the long-term. Annuity insurance is one option consider, an arrangement in which an investor makes an upfront, or ongoing payments, and in return receives return payments of principal and interest for their retirement. Return payments can be for a period of time or for the life of the investor.
Annuity insurance can provide many benefits including unlimited contributions to a tax-deferred income stream. Annuity payments give retirees structure, and a beneficial way to plan their spending, and ensure money for life.
There are three main types of annuities: fixed, variable, and indexed. Here we will focus on the safest, and most common type; fixed annuities. A fixed annuity ensures a standard rate of interest on your investment for a stipulated period irrespective of fluctuations in the economic status of the marketplace.
A fixed annuity is a widely preferred option among investors due to its protection of principal and security for retirement. There is a guaranteed return of both earnings and the principal. As well, fixed annuities can provide a higher rate of return than other common “safe investments” such as Bank CD’s or Government Bonds.
There are two kinds of fixed annuities. An Immediate fixed annuity, which implies that the investor starts receiving payments immediately or within a very short period after the principal is deposited. This is commonplace for retirees, as US annuity investors are not able to receive payments (without tax penalty) until the age of 59.5 years old.
The second type of fixed annuity is the deferred fixed annuity where the principal amount is left to mature for a certain period of time in a non-taxable form and the interest earned is obtained on the completion of the given period.
Although there are many reasons to consider a fixed annuity as part of your retirement investment portfolio, it does have its own share of drawbacks, and don’t let anyone tell you differently. One issue with annuities is a lack of liquid capital. Money invested into fixed annuities can be withdrawn before the age of 59 and a half, however, not without penalty from the IRS, and possibly an additional penalty from the insurance provider. Always consider your financial position before investing.
There are many benefits to having a fixed annuity as part of your portfolio, but there are downsides as well. Always consult a financial professional before making any long-term financial investment.
John C. Ryan writes content regarding annuity insurance, providing investors with the information they require to examine their fixed, variable, and index annuity options.