In today’s uncertain financial landscape, annuity financial instruments stand out as both a blessing and a curse. To its supporters, the annuity, in its various styles, offers a reliable predictable income source with protection of principal/premium and provides peace-of-mind which is more than just a financial benefit. For more aggressive investors, however, annuities are viewed as possible money traps, locking up assets that could be used to produce more generous returns, albeit at greater risk.
Most experts agree that annuities are best for conservative investors. For income purposes these products should be considered more like Social Security and less like higher risk securities. However, for certain investors, annuities provide a reasonable rate of return that satisfies their expectations balanced with safety.
Most financial advisors would agree that annuities are not designed to be aggressive growth vehicles. However, to balance a retirement portfolio, they can be used to improve safer growth and income during retirement. Such an investment can make sense if Social Security or pensions are expected to be too low or non-existent.
Annuities come in a variety of flavors, but they essentially work in the same basic fashion. You pay a predetermined sum of money called premium to an issuer who contractually guarantees future payouts or they commence with immediate payouts, unless the annuity is deferred earning interest indefinitely. The overarching concept behind annuities is to provide safer growth to principal/premium and a predictable income stream over the term, or length, of an annuitant’s life. Annuities can be setup for lifetime or shorter duration payouts. When you’re ready annuity providers will calculate your life expectancy and determine monthly or annual payouts based those calculations and present you with the best annuity rates.
For example, an annuity that starts at age 65 might be structured to pay out for 20 years or your lifetime as an unknown. The account balance of the annuity will be factored by a predetermined contractual formula to determine an income stream. Depending upon the terms of the annuity, it may continue to for life or a determined number of payments. Unused portions of deferred annuities typically go to any beneficiaries outlined in the contract.
As alluded to earlier, there are many variations of annuities. For example, you can put your money into an annuity and start collecting immediately; this is called an immediate annuity. By contract, a deferred annuity defers the income start date of payouts indefinitely or at a date of your choosing. Additionally, annuities can offer fixed rates while others can offer varying rates, with interest or returns tied to the markets. Other variations include single premium payment versus multiple premiums.
For investors who relish predictability and stability in their financial lives, the right annuity offers a piece of mind that other riskier investments cannot provide. While no financial product is without some risk, annuities are a financial instrument that appeals to many people. With proper research, due diligence, and realistic expectations, they are worthy of consideration for a balanced retirement portfolio. Annuities are the one financial product that can guarantee an income for the remainder of one’s life. In these unstable times, that kind of predictability is more than likely worth the price of admission.
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