Everybody looks like a genius when the markets are doing nothing but climbing. But we all know that markets can go down as well as up. In fact, they often do.
Stocks of any kind are innately risky, and there are never any guarantees. For that, you have to go with annuities.
Annuities vs. Mutual Funds
Mutual funds- With mutual funds, you and a bunch of other investors pool your money and hire a money manager to make investments on your behalf.
You own a direct fractional interest in everything in the fund. When the assets in the fund go up, you make money. When they go down, you lose money. The fund company owes you nothing beyond the performance of the portfolio, minus expenses.
Annuities- Annuities are specifically designed for you to convert to income at some point in the future. You don't own the securities directly.
Instead, you own a contract. This contract can be structured in a wide number of different ways, but generally promises you a specific interest rate on your premium, or a specific monthly or annual payout, or a specific guaranteed minimum payout of some kind.
Fixed annuities are guaranteed not to lose money, and there variable annuities that may lose money but may include other contractual guarantees, such as a guaranteed minimum income rate when you annuitize the contract.
But what all annuities have in common is that you are not directly exposed to market ups and downs, because you don't own a direct interest in the portfolio. The insurance company, not you, owns the underlying securities.
Because annuities are not directly tied to potentially wild stock market swings, they may be terrific ways to 'lock in' a minimum acceptable interest rate or future payout.
As long as the insurance carrier remains solvent, it is contractually obligated to provide you with the income or sum promised.
Immediate vs. Deferred Annuities
Immediate annuity- This is purchased from an insurance company with a single, lump sum amount and the stream of income begins right away.
Deferred annuities- The stream of income starts later. Meanwhile, your premium contribution accrues tax-deferred. You pay no tax on earnings within annuities until you annuitize, or take income.
Lifetime Income Annuities
These contracts provide a fixed and predictable level of income to the policyholder for the rest of their life, or for the joint life spans of the policyholder and a secondary individual, who could be a spouse, child or grandchild. You pay a premium and receive a set monthly or annual income for life, guaranteed.
Fixed vs. variable deferred annuities
These are deferred annuities. Fixed annuities guarantee a specific interest rate, while variable annuity balances will vary depending on the particular subaccounts you select.
Your guarantees in the contract are calculated based on the eventual performance of the securities the annuity company holds within these subaccounts. But they cannot provide less benefit than your annuity contract guarantees.
At any rate, even variable annuities provide a "death benefit." If the policyholder dies, the insurance company will typically pay out to heirs at least the premium the annuity owner paid in.
Annuities and market risk
Annuities are useful tools for controlling risk because they can insulate the individual's portfolio from the larger movements of the market, either partially (in the case of variable annuities that still have minimum income, minimum lifetime benefit, or other guarantees written into the contract) or completely (in the case of fixed annuities and lifetime income annuities.)
If you need to save money for retirement, can lock up money for several years, and want to control or eliminate market risk, an annuity may be a suitable option for you.
If you want to find out if an annuity is right for you, you can contact us for an appointment to discuss the pros and cons.