Annuities 101
Over the last several years annuities have been increasingly popular investment vehicles for seniors. An annuity is an investment contract made between you and an insurance company. Buying into an annuity will provide you with tax-deferred funds for your retirement years, paid to you in regular increments. While annuities can be an excellent addition to your retirement planning they are not without shortcomings. Before you jump on the annuity bandwagon spend some time weighing the pros and cons of this type of investment.
Annuity Pros
An annuity will allow you to put away large sums of money without the restrictions placed against IRAs and 401(k) accounts. This makes annuities very popular with seniors nearing retirement age especially those that find themselves a little behind on their nest egg.
- The money you put into an annuity is tax-deferred.
- Money made off of your annuity is put back into the investment. Your dollars are compounded yearly without having to pay any taxes on the interest made.
- Annuities give retirees the option of regular payments or a single lump-sum payout for large purchases.
- Annuity Cons- Beware the hidden fees
- Commissions on annuities tend to exceed those of other investment vehicles. Some insurance brokers collect as much as 10% commission on the sale of an annuity.
- You want to be certain that the money you put into the annuity can stay there until it matures. The charge for withdrawing funds too soon is typically 7% of the annuity’s value. This surrender charge varies greatly between insurance companies, so it is important to know the penalty up front.
- Annual fees can take another bite out of your investment. Again these percentages differ among companies, but they also differ among the different types of annuities.
With several types of annuities available you will need to take the time to learn the nuances of each variety. Fees, payment plans, and rate of return will help you determine the option right for your retirement needs. Here are a few of the most popular annuity categories.
- Premium Annuity- This standard annuity calls for you to make a single payment to the insurance company.
- Variable Annuity- A riskier option, with a variable annuity you allow the insurance company to invest your money for a number of years.
- Fixed Annuity- Your investment will earn money at a fixed interest rate. This annuity is safer than a variable annuity, but rates of return are generally lower.
