Under The Sun With An Annuity

If there is “a time under the sun for everything,” then surely there is a time in your life when you can look in the mirror and rightfully tell yourself, “I’ve worked hard all my life.  I’ve met every challenge life has thrown me.  It’s time to stop working and to start living life my own way.  These are the years that belong to me.”

In a way, retiring is like going on a trip abroad.  You wouldn’t just pack a suitcase and board a plane.  You try to prepare for your journey.  You’d read guidebooks about the places you plan to visit, study currency rate, and find out what kind of weather to expect. And of course you’d prepare a itinerary so you’d know where you are going and when. 

Similarly, if your journey into retirement is to be successful, you must equip yourself with the information you’ll need on your journey into the world of Social Security, Medicare, medigap, long term care, pensions and 401(k) plans. 

Today retirees must decide how and where to roll over their retirement assets, when to begin taking Social Security benefits and how to allocate their investments so that their financial needs are met.

Now that you have saved bit of money, think about how you can diversify your investments.  While a retiree maybe reasonably secure financially today, some still have to worry about whether they could run out of money during retirement. Retirees today face a complex financial and emotional landscape that can stretch out for 30 years or more in some cases.

It’s never a good idea to put all your “eggs in one basket.” A small amount of money must always be in your bank where you can withdraw for emergencies.  The rest of the money should be in various investments such as bonds and money market funds and annuities. Annuities appeal to people who want a predictable monthly income.

Annuities can play a useful part in the retirement asset allocation process by providing additional income streams. Many of those that invest in annuities will do so once they have reached their limits on other retirement savings options (i.e. when maximum contributions have been made to 401(k)s and IRAs).

Annuities can play a useful part in retirement planning for some. Those looking for a guaranteed income, for example, might use these products to form their base income and use savings with less predictable returns as an add-on.

There are various advantages to annuity investment. These products can, for example, give the following benefits:

• Income guarantees: Annuities can give a guaranteed income. A fixed annuity, for example, will give a secure income for the contracted period.
• Payment flexibility: Annuities can be purchased with a lump sum payment, regular payments or periodic payments. This allows individuals to use them at various life stages. Some will buy early in life; others will buy just before retirement.
• Annual contributions: There are no pre-set annual contribution limits for annuities.
• Payout flexibility: An annuity can be set up to make a one-off payment or regular payments (i.e. monthly or annually) for a number of years or for life.
• Tax status: Any profit made on an annuity will be tax-deferred until it is paid out. In some cases tax will only be applied to interest earned and not to the principal investment.
• Death benefits: If the investor dies before the annuity pays out then their next of kin will usually receive at least what they have paid in. In some cases, if they have a pre-determined payment schedule, they may also receive the income.

For many, the primary advantage to using annuities is the fact that they can be used for guaranteed income that does not have to be dependent on stock market returns. To make money in equities, we must be very expert in market trends and politics.

Even the weather can affect the stocks! When you are investing for your future, you need to realize that the best route is to risk a little for a little gain; otherwise, the odds will quickly catch up to you. It’s your future; play it safe, and you actually will have one.

Choosing whether an annuity is a suitable retirement investment tool also involves looking at the disadvantages. These include:

• Tax status: At least part of annuity payments may be liable for taxation. In some cases (i.e. a lump sum payment) the entire annuity payout may be taxed. Tax rates are set at income tax levels which are higher than the dividend rates charged for other investments such as mutual funds.
• Age limits: An annuity cannot pay out until the investor reaches the age of 59½ without penalties. Closing down an account inside a specific timescale can incur additional early settlement fees and costs.
• Inflation: The set payout that is given may look good when buying the annuity but the effects of inflation over the years could reduce the real value of the payout when it happens.
• Lack of flexibility: Annuities offer fixed benefits and once a contract has been signed it may not be able to be changed. If changes can be made, there are likely to be costs involved.
• Death: Although an annuity will pay back payments made or continue paying out (depending on the product stage) those inheriting this cash will have to pay income tax on it.

What is an Equity Indexed Annuity?

With an Equity-Indexed Annuity, your return is tied to the increase in one of several stock market indexes, such as the S&P 500. However, if the stock market goes down, you do not lose any of your money. In fact, most Equity-Indexed Annuities will even GUARANTEE you a minimum annual return (typically 3%), even if the index you invested in goes down the entire time you are invested.

An Equity-Indexed Annuity is a great place to protect the money you’ve saved in your CDs, money market accounts, IRA accounts, etc. Or perhaps as an alternative for the money you currently have invested in stocks and mutual funds. Equity-Indexed Annuities can greatly improve your earnings potential, while at the same time keep your principal safe from market fluctuation.

Additionally, Equity-Indexed Annuities are a good option for people who already own annuities and have seen their interest rates drop substantially. Many people do not realize that you can easily trade-in an older, possibly under-performing annuity for one that better suits your needs. This exchange can be accomplished with no out-of-pocket expense or current taxes to pay!

Just how good of an investment are Equity-Indexed Annuities? Well, if you had bought one just before the collapse of the stock market instead of investing directly in the stock market itself, you would be a much happier person right now!

Upsides of EIAs
If a deferred annuity is an appropriate part of a person’s overall financial plan, an EIA can be a good way to “share” in the potential gains of the stock market, while at the same time being assured that the principal investment will not go down in value (even if the stock market index to which the EIA is linked goes down). Some EIAs also provide for a guaranteed minimum rate of return. As deferred annuities, EIA earnings are not taxed until funds are withdrawn.

Like other annuities, an equity indexed product allows an individual to buy a form of insurance that can be converted into income at a later date. This is usually used to provide money in retirement. This option is often described as a “best of both worlds” solution that brings both fixed and variable payment components to the table. This may give a better return than a fixed annuity without the risks of a variable option.

So, for example, equity indexed annuities will pay a guaranteed minimum when they mature like a fixed product. But, they may also give an income boost as they incorporate a variable element linked to a stock market index. If this performs well then an annuity may pay out more than the fixed minimum. If performance is low, then the guarantee gives some security.

An individual who worries about having a large enough income to fund later life and who has a cash lump sum available may find that this is an investment solution worth considering.