How to Compare Annuities
Annuities come in many distinct flavors, designed to meet a wide variety of retirement and financial planning goals and satisfy various risk levels. To choose an appropriate type for you, first consider what you intend to accomplish. If you're still young and just starting to save for retirement, chances are you're looking for a deferred annuity – which accumulates periodic deposits and credits tax-deferred interest, much like an IRA or 401(k). If you're on the brink of retirement or already retired, chances are you're looking for an immediate annuity – which takes your lump-sum deposit and starts paying out a monthly income stream. After making this basic determination of deferred vs. immediate, it's time to consider whether fixed, variable, or indexed annuities are more appropriate.
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Before You Compare Annuities
Consider whether or not you really need or want an annuity: With plenty of time to ride-out even the most radical market fluctuations, a young professional just beginning a retirement portfolio should invest the maximum allowable amounts in 401(k)’s or Roth IRA’s. They allow both the greatest control over your investments and the greatest flexibility; they also afford the most room for growth, and all your contributions to these retirement funds reduce your tax liability, because they are deducted from your income before you are taxed. Young investors shouldn't consider annuities unless they've maxed out their 401(k)'s, are considering early retirement, are seeking protection for their money against litigation, or have come into possession of a large sum of money, like an inheritance.
If, on the other hand, you recently have retired and your employer has paid-out your 401(k); or if you otherwise have separated from, long-term employment and have substantial severance and retirement settlements, an annuity will help you preserve your principal and secure steady income. This is most often satisfied with an immediate fixed annuity. Deferred annuities are well-suited to investors who are 10-15 years out from retirement and want to bolster their retirement nestegg. Additionally, if you have received substantial bonuses, scored major gambling purses, or sold a home for profit, an annuity can help maximize your wealth by letting it work for you and earn interest.
Annuity Comparison: Determining Your Type
Once you've determined that you're a good candidate for annuity investment, start comparing and contrasting the details. The most important question is to determine which annuity type is best for you: fixed, variable, or indexed? In other words, how well do you tolerate risk and what sort of returns are you looking for?
With a fixed annuity, the insurance company guarantees the rate of return at the time you purchase your annuity, and it will continue growing at that safe and secure rate for as long as you or your heirs own it. The return is modest, but it is armor-plated against stock or bond market meltdowns, arguably one of the safest retirement investments around.
Immediate fixed annuities are most popular with retirees, who need to make sure their savings outlasts their life expectancy. This is accomplished with a feature unique to annuities – the lifetime income option. In this case, the insurance company guarantees a steady monthly payout for the remainder of one's life for a single lump-sum payment.
Deferred fixed annuities are popular with investors in their 50's, allowing them to contribute monthly deposits to their retirement savings while they're still employed. This is done to build up tax-deferred wealth that can later be converted into a retirement income stream by rolling over to a
immediate annuity once hitting age 65.
Of all annuity types, immediate and deferred fixed annuities offer the most safety but also the least yield. See more on how to find the Best Fixed Annuities.
Variable annuities start to take on considerable risk. Now you're paying the market by tying your annuity’s growth to stocks or mutual funds. Still, there are times and people for whom variable annuities are well-suited. This usually applies pre-retirement investors -- people in their late 40's and 50's -- looking for high-growth. These individuals should have a healthy risk-tolerance as their returns will fluctuate and even go negative. Given the unpredictability of the market, not guarantees can be offered by insurance companies. Safety comes from long-term historical market return (which is strong and positive) and smart asset allocation (not placing all of one's eggs in one basket). Variable annuities are typically deferred because they are most suited to pre-retirees looking to build wealth and not actually produce an income stream during retirement (which would be needlessly risky). For more an how variable annuities work, see the Variable Annuity Guide.
An indexed annuity splits the difference between fixed and variable, attaching your rate of return to the Standard and Poor’s Stock Market Index or one of the other reliable barometers of investment growth. Indexed annuities are great in that they allow investors to participate in the market (and thus get a large return on average) while still protecting their capital. Indexed annuities do this through guaranteed minimum returns. For a deeper discussion of these annuities, see Equity Indexed Annuity Guide.
Purchasing an annuity is a big decision. Online research is a good start, but prudent investors should discuss all their options and risks with an independent financial advisor. Request a free, no-obligation consultation today, along with a report of current rates on brand-name annuities.Speak with an advisor over the phone about annuities for FREE.
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Other Factors to Compare
Cost of Living Protection: fixed annuities pay between 3% and 8% per year. Although not officially tied to the Gross Domestic Product, the earnings rates tend to mirror trends in American economic expansion. Inflation, however, does not correlate so neatly . Therefore, for an additional premium, you may protect your regular payments from inflation’s ravages by building-in provisions for regular cost-of-living increases. To determine the prudence of this extra coverage, you must assess how well Social Security and other retirement funds will complement the payments from your annuity.
Joint and Survivors’ Benefits: if you’re married, you must decide whether or not your “lifetime” benefits will extend to your spouse after your death. If both of you have worked for all of your lives, you may elect separate annuities and provide for one another, or you may simply insure yourselves. The terms of your trusts and wills will determine whether or not you want the principal assigned to your beneficiaries or managed by any of several other options.
Disability and Long-term Care: many annuity contracts offer options or riders for disability and long-term care coverage. Although each contract will spell out the conditions slightly differently, this provision in general guarantees minimum payments if you become disabled or require nursing home treatment. Because they cost extra on many policies, consider where this sort of protection is worth the cost and who it overlaps (if at all) with your life insurance policy and employer-provided disability insurance.
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