Why Do Annuities Matter?
With all of the current news about market accounts dropping, and the dismal interest rates paid by bank CDs or savings accounts, people are looking for an alternative in order to save for retirement. An alternative would be save, guarantee some rate of return (or at least, that value will not be lost), and it would return better interest rates than most banks do. That is where annuities may help. You can also get more info here: explain annuities.
How Do Annuities Work For Retirement Savers?
Note: For this discussion, we are talking about fixed annuities, or those sold by insurance companies and agents. Variable annuities are riskier, and while they may promise greater returns, they are outside the scope of this article, and my expertise!
Who Are They Good For?
Annuities are good for savers with a medium to long term savings goal in mind, and for those who can commit to that goal. They are also used to provide a guaranteed payout over some span of time. This time period could be from several years to lifetime payouts.
Types of Fixed Annuities
An immediate annuity accepts a lump sump cash contribution, and then it begins to make periodic payments right away. Consider a retiree who has just cashed out his employment account for a few hundred thousand dollars. He or she could purchase an account, and then start to get monthly income from that account right away. In return for having the money tied up, a guaranteed series of payouts would come back. This could give that retiree the security of income for a span of years, or even for a lifetime.
A deferred annuity, on the other hand, accepts contribution that will be paid out in the future. This could be a lump sum cash amount, or it could be in the form of periodic contributions. Either way, the owner is expecting that money to grow, and to either provide a lump sum or payouts in the fugture.
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How Do Annuities Earn Money?
Contracts differ. Some may have a set interest rate. Others could be tied to a major market, like the S&P 500. They may follow this index during growth years, returning a positive return rate. But the real selling point of fixed annuities vs. market funds is a guarantee they will not lose money during bad market years. They may guarantee that the return will never be negative, or they may even have a small positive (i.e. 2 percent) growth rate guaranteed.
Annuity Disadvantages
Nothing is ever perfect, though these types of retirement funds can be attractive for many people. There is usually a stiff surrender penalty. Let’s say you commit to keeping your annuity intact for 7 years. There would be a penalty, where you could lose money, if you cash it in before that time. In most cases, there will be some sort of exceptions to this charge – say in the case of nursing home confinement or terminal illness though.
Tax Advantages
The tax deferred status of the growth and payouts are big positives too. Even if an annuity does not earn the highest possible return on the market, the tax advantages may make it very attractive to some investors. Since individual circumstances differ, and since tax rules change, you will need to see how you can benefit from this on a case by case basis.
Finding the Best Annuity for You!
When you put together all of the individual goals different people have, and all of the different times and amounts of payouts and returns, it is easy to see why I cannot recommend one particular product in a general article! But you can take a couple of minutes and look at products that would be good for a retirement saver like you.
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Seems like the term “Bubble” in relation to any asset class is this years equivalent to 2007’s term “a perfect storm”. It’s a great term for cocktail party conversation but it isn’t particularly useful in assessing an investment strategy. A bubble is only recognized in hindsight. People were predicting a real estate bubble as early as 2000. It wasn’t until 2008 that the prediction came true. Every asset class with returns that exceed the long term averages is potential bubble. If you?re worried about a bond bubble you may wish to worry more about a gold bubble.