The idea of retirement, can seem overwhelming all in itself, then having to understand the best way to plan for it can be a completely different hurtle as well. Once upon a time we used to work for one company our entire career and when we retire, that employer would provide us with a pension for the rest of our life. We would also begin to collect our social security checks from the government and then supplement any other financial needs and wants with savings via other safe financial instruments like Cd’s. We would go on to live modest lifestyles. Well I think we can all agree that times have changed a little bit. The average person will likely work for several employers. Virtually none of which who are still offering pensions unless you got grand-fathered into one before companies started dumping them like a bad habit. As you know, the idea of social security being around for all of us when it comes time to retire has been called into question. Not to mention if your banking on CD’s as a viable supplement to you retirement savings, I’d say reconsider taking into account the current interest rate environment. Further, people are living longer and more active lifestyles. Remember how I mentioned that planning for retirement can seem overwhelming, well yeah I’m sure this didn’t make things any easier. What do you do?! Well in this post, you will learn that some annuities can act just like the oh so coveted pension plan that employers once offered and in some cases, even better. The difference is, you can get one of these on your own regardless of the fact if your employer offers one or not. Lets take a closer look at the different types of annuities.
There are Four Basic Types of Annuities
Immediate annuities (sometimes called income or payout annuities), are pretty straightforward – basically a mirror image of a life insurance policy. Instead of paying regular premiums to an insurer that makes a lump-sum payment upon your death, with an annuity you give the insurer a lump sum of cash in return for regular income payments until you die. (Actually, you have the following options: payments for a specified period of time – say, 10 or 20 years – or payments that will continue for as long as you or your spouse is alive.)As the name suggests, immediate annuities start paying out right away, so they’re are frequently used by people already in retirement.
Immediate annuities start paying out right away, and can prevent retirees from outliving their nest egg.
You lose all control of your money. And you have one option “your specified income”
Might remind you of a Treasury bond, in that it earns a steady rate of return between 1 to 4 %, The longer the term the higher the earning Percentage. The insurance company holds your money and uses it, similar to the way a bank does.
Pay guaranteed rates of interest, which makes them appealing to investors wary of the stock market’s ups and downs. What also makes them appealing are their low investment minimums – usually $1,000 to $10,000 – and the fact that the interest they pay escapes taxation until you pull it out.
Their rates can also be fixed for a limited period, and then drop say, after the first year. If you don’t like the new rates and want to withdraw your money early, heavy surrender charges could kick in and cut into your returns. Plus, if you decide to opt for fixed lifetime payments, those payments will not rise to keep pace with inflation. As a result, the value of the money you receive will decline over time as inflation erodes the purchasing power of each dollar. So for example, if you retire young and plan to keep collecting annuity payments for a longer period of time, the purchasing power of your money could be a big concern.
Is a tax-deferred retirement vehicle that allows you to choose from a selection of investments, and then pays you a level of income in retirement that is determined by the performance of the investments you choose. Compare that to a fixed annuity, which provides a guaranteed payout.
Unlike their fixed counterparts, variable annuities are designed to pump up your savings by giving you a chance for long-term capital growth. They do this by allowing you to invest in anything from half a dozen to 20 or so stock or bond mutual-fund-like portfolios called subaccounts. As with fixed annuities, gains escape taxation until withdrawal. Because of the growth potential, a variable annuity may be more likely than a fixed annuity to outpace inflation.
You stand to lose earnings and even principal, if the market drops. Add to the fact that fees for variable annuities range from 2% to 8% per year whether the market is up or down. You have to be very careful about the term on these products.
Is a combination of a fixed and a variable annuity. The marketing pitch usually goes something like this: Equity-indexed annuities give you the best of both worlds. Guaranteed return: As with a fixed annuity, you get the low-risk appeal of a guaranteed minimum return (usually 2% to 3%). With some upside: But, as with a variable annuity, you also have a shot at higher gains if the stock market rises, since an equity indexed annuity’s return is also tied to the performance of a benchmark index, such as the Standard & Poor’s 500.
You get to participate in the upside when the stock market is climbing, but you also protect yourself against the downside since you’ll earn a guaranteed minimum return even if stock prices fall. In short, an equity-indexed annuity may pay a higher return than a standard fixed annuity would, but have less risk than a variable annuity. They mainly design to give you income for life like an immediate annuity, but gives you options and don’t tie up all your money.
Equity-indexed annuities are very complicated investment vehicles, and they come in a wide variety of forms. Their complexity makes them extremely difficult for investors to understand, and marketing pitches can often be deceiving. They also don’t necessarily give you the entire return of the market index they’re tied to. Different equity-indexed annuities calculate your gains in different ways. For example, some give you only a portion of the index’s overall return, or set an annual cap – and most exclude dividends. So if the market returns are a big draw for you, make sure you know exactly what you’re getting.