Concerned about the effect a volatile stock market could have on your retirement? Consider an annuity.
When you purchase an annuity, you sign a contract with an insurance or investment company to provide a guaranteed income. Your payments will begin at a time specified in the contract. The contract can be for a fixed period or last your lifetime.
There are a variety of annuities to fit your needs when you retire. Here are some of the most common:
•Fixed Annuity — Similar to a certificate of deposit (CD) investment, you receive a guaranteed rate of interest on your investment. You can choose whether these payments arrive monthly, quarterly or yearly. Fixed annuities offer security: your payments won’t decrease if the market does poorly; however, they won’t increase if the market does well.
•Deferred — From the time you start paying into an annuity until the time you start receiving income payments, your money earns interest at a rate set by the insurance company. Once payments start, the amount you receive does not change.
•Immediate — With a single premium immediate annuity, you pay one lump-sum premium to an insurance company and your income stream starts immediately. For instance, if you paid a $400,000 premium at today’s current market rate, you’d immediately receive $22,000 per year – regardless of how long you lived.
Interest rates for immediate annuities are usually higher than CD or Treasury rates. Some annuities can have riders added that increase payments with inflation. Annuities also differ from investing in CDs or Treasury bonds, because with an annuity, part of the principal is returned with each payment. This gives you a higher monthly income than just living off the interest of CDs or bonds.
•"Laddering" Annuities — With this strategy, you periodically purchase immediate annuities over a period of years to minimize interest-rate risk. You also can purchase annuities from a variety of insurance companies to minimize risk of an insurer going out of business.
•Indexed Annuity — Similar to a fixed annuity, the rate of return is based on a market benchmark such as the S&P 500 Index. If the market goes up, you benefit, although most indexed annuities have a cap on payments. If the market goes down, you don’t lose money.
•Variable Annuity — Similar to a mutual fund, you can invest your annuity dollars in a variety of funds called sub accounts on a tax-deferred basis. Upon retirement, you receive a guaranteed minimum income regardless of how the assets perform, but you could receive a higher return if the investments perform well.
Is it Right for You?
If you are seeking a stable, guaranteed retirement income, then an annuity can be an easy option. There is no need to check the market or make adjustments to a plan. Many retirees put only a portion of their retirement funds in annuities so they can make sure they have at least a minimum income to cover the essentials. They invest the rest of their funds in the stock market, where the funds can grow (or possibly decrease).
Many lottery winners, who are concerned that they will spend all of their money at once, put their winnings in an annuity so they have steady cash flow.
It’s important to work with a reputable insurance or investment company, because the future of your annuity will be tied to the financial strength and claims-paying ability of the insurer. Once you pay the premium, you will not have access to the money unless you pay withdrawal penalties.
Some annuities can be passed on to your heirs, but it all depends on the terms of the annuity contract.
How to Get Started
When looking for an agent or broker who sells annuities, check to see if they hold a state-issued life insurance license. They must also hold a securities license if they offer variable annuities. Please contact us for more information.