Annuities – The Magic Bullet

There is no magic bullet to keep from running out of money, at the end of the day, a retiree’s success will be driven by his or her ability to maximize income and minimize expenses. In a survey, done by Allianz Life Insurance Company of North America in May 2010, two-thirds of Baby Boomers said they are more afraid of running out of money than of death.

Without money, we cannot enjoy the basic necessities of life that is food, clothing and shelter. 

Putting money into an old fashion savings account may seem like a good way to plan for retirement. However, it is not.

Therefore, wise use of money and saving it for future purposes becomes very important. 

One of the main problems in society today is the fact that people are living longer and creating the chance of outliving their assets. This will be an ongoing problem in the next 20+ years when it is believed that social security may dwindle away.

Making financial choices for your hard-earned money may be one of one of the most stressful things you do.  Retirement savings are a function of four variables: income, expenses, time and after-tax return. Those approaching or currently in retirement will usually do best with additional conservative investment strategies.  When the need of a steady source of income arises, this need can be fulfilled by way of annuities.

Another large problem is that companies are moving further away from pensions and moving more towards 401K’s and IRA’s. This is giving more of the retirement investing to the employee and taking the burden off of the employer.  The current US pension plans have taken a major hit especially after the 2008 credit crunch. A lot of people lost their pensions due to the collapse of several financial institutions.

For this reason alone, for the retirement aged crowd, one of the most popular investment types is annuities. Therefore a lot of people are looking at annuity solutions of their savings or finances for long term post-retirement benefits.

Social Security was never intended as a retirement plan, but as a supplement to savings. The key to a successful retirement is not to rely on any single income stream, but to build multiple income streams. These would include Social Security, 401(k), IRA (Roth and/or Traditional), pension plan, bonds, and of course, income annuities provide the most solid foundation to a good investment plan. 

An annuity is the best way to secure your retirement and to make sure you do not have to depend on anybody for your financial needs in your old age. Annuities are a good investment but it depends on if it is applicable to an investor’s situation and risk tolerance.  Annuities are legitimate securities that can be a very profitable long-term investment option for the right person. 

Fixed annuities are comparable to bank CD’s and offer a fixed percentage of return often much higher than interest rates of bank CD’s. Indexed annuities are designed to have a safety of principal similar to CD’s, money market funds, and savings accounts. They are often linked to an index and guarantee a minimum rate of return but put a ceiling on a maximum. 

Understanding the rules and features of an annuity can help you make the most of this retirement investment tool.

Accumulation or Payout Phase

  An annuity typically features two phases. During the accumulation phase, you make periodic deposits that are allocated to various investment options. The gains generated inside the annuity are tax-deferred until you begin receiving payments. The payments begin during the payout phase, and you are taxed on the earnings at ordinary income tax rates rather than lower capital gains tax rates.

 Fixed Annuity

  In a fixed annuity, the insurance company guarantees that you will earn a minimum rate of interest during the time that your investments are growing. The insurance company also guarantees that you will receive periodic payments guaranteed to equal a certain amount per dollar in your plan.

Payout Options

  At the beginning of the payout phase you may choose to receive your deposits and accumulated investment gains in a series of payments at regular intervals, generally monthly. Most annuity contracts offer you a choice of payment streams from a fixed period of no less than 20 years to an indefinite period such as the length of your lifetime or the lifetime of both you and your spouse. These latter options guarantee that neither you nor you and your spouse can outlive the retirement income paid from an annuity.

Death Benefit

  A common feature of an annuity is the death benefit. If you die, the person selected as your beneficiary may receive the greater of the accumulated value of your account and the total deposits made.

Surrender Charges

  Annuities also may incur charges if you make withdrawals in the early years of the contract. These surrender charges are usually applied as a percentage of the amount withdrawn and gradually decline over a certain period of time. The typical annuity contract has surrender charges declining over an average period of seven years.

With the right retirement planning tools you can make the right decisions today that will help you be happier and more financially secure when your retirement comes. It is important to remember to be flexible in your planning and make adjustments as circumstance in your life warrants.