By Byron Udell
An annuity is a financial product that accepts payments (either a lump sum that accrues interest over time or payments in installments or premiums that will also accrue interest over time) and upon annuitization, will make a series of payments back to the individual, as a sort of income. An annuity is a tool that is meant to last. So even if annuities vary greatly in structure, they're meant to be long standing instruments that you should view as a long term investment. Annuities are good investment options for seniors because they are a supplemental income plan for retirement. They are low risk financial products as compared to other options for retirement. They also usually have guaranteed interest rates which seniors benefit from because this is again, a comforting low risk scenario. Even if the markets tank, they can expect to receive these returns.
How will you know if an annuity is a good investment option for you?
The answer differs from person to person. First, says the California Department of Insurance, look at your financial situation, then your health, then your overall goals. You may be looking at an annuity because you want to supplement your retirement incomes. Start by looking at what you have with you: how much SSI is you looking to get and if you are on a pension plan of any sort. How many people will this income cover? Some retired couples may have annuities and pension accounts set up for themselves. Others may require supporting a child or other family member. Then think about how much it will cost you. Can you actually afford the premium payments? Do you have the luxury to leave the money inside the annuity for several years at a time? Are you going to need money for expenses like hospital bills, long term care or assisted living needs? Even if you decide to steadfastly keep the money inside your annuity, what surrender charges would you be looking at in an emergency? Some annuities have benefits and allowances like partial withdrawals, which allow you take a small amount out of the annuity contract without being penalized. Since annuities can be a complicated affair, it makes sense to receive sound financial advice from a qualified person who can independently review your financial status and make recommendations that are appropriate for you.
When you're ready to seriously consider buying an annuity, remember these advantages:
- Though the rate of growth is slower than other riskier investments, they can easily outperform a Certificate of Deposit's growth rate.
- They can guarantee interest rates at 3-4% for as long as 5 years.
- Annuities earn interest on a tax-deferred basis. So don’t pay taxes on any interest earned until its time for withdrawal. Fixed deferred annuities can offer competitive rates of interest as compared with other safe-money instruments.
- If you choose a lifetime income annuity, you can earn a monthly income for the rest of your life, which you won't outlive. However, you can also elect to receive benefits for a certain number of years instead. Make sure to find out how survivor benefits will work out in the case of your annuity in case you pass away during the benefits period.
Baby boomers facing retirement are looking at a serious shortage of retirement contingency plans. For rich clientele, an annuity is a specialized product that can serve them well. For older couples facing retirement in the imminent future, an annuity may not allow enough accumulation time. If you are a young couple and want to invest your money in higher interest earning accounts, consider the amount of risk you're willing to offset your investment at. Make sure to read up on all necessary documents before an annuity purchase. Check the credit rating of the company you'll be buying from, to make sure your investment will be safe in the long term. Buy only from a company that has been rated A- or higher by AM Best ore the equivalent S&P rating. And remember to get quotes so that you can compare and rate annuities before buying.