Similar to a bank-issued Certificate of Deposit (CD), an annuity is a savings investment backed by an insurance company. Investors purchase an annuity and, after a certain time period, receive a return on the investment. Many investors choose to add annuities to their financial portfolios, since annuities provide a guaranteed income stream during the payout period.
Unlike investing in stocks, where stockholders could lose their entire investments, annuities earn interest on contributions without the possibility of losing the principal. In this aspect, annuities are more stable than stocks or index funds. Also, even during periods of poor market performance, annuities provide a minimum return. This allows you to add a low-risk investment to your portfolio.
Understand the Types of Annuities
To better protect your money, it’s important to first investigate and understand the three primary types of annuities: fixed, variable, and indexed. A fixed annuity, also known as a multi-year guaranteed annuity (MYGA), guarantees a fixed interest rate on your contributions over a period of time. This allows for the least risk and highest predictability over time on your returns versus other types of annuities.
Variable annuities are similar to mutual funds in that they are made up of sub-accounts. The performance of the subaccount determines the return of the invested funds, so payments on variable annuities can fluctuate over time. Indexed annuities offer a return based on the performance of a market index like the Dow Jones Industrial Average or the S&P 500.
5 Reasons To Consider a Fixed Annuity
Fixed annuities are popular with many individuals near retirement because they’re more steady and predictable than variable or indexed annuities. Here are five reasons to consider investing in a fixed annuity.
- Fixed Annuities Can Accrue Substantial Interest Over Time
With the average life expectancy increasing, many people don’t have enough money saved up to sustain the lifestyle they want during their retirement years. Increased expenses such as healthcare, market losses, and unanticipated expenditures can consume a large portion of a person’s retirement income. A fixed annuity is a savings fund that grows consistently and predictably, accruing substantial interest over time and boosting one’s income after retiring.
- Annuities Provide Tax-Deferred Income
Taxes are often a citizen’s greatest expense. The Bureau of Labor Statistics (BLS) reported in 2021 that the average consumer unit paid $8,689 in personal taxes, even more than the $8,289 for food. The tax deferment on fixed annuities is very important for wise investors who see the value of earning additional interest on pre-tax dollars until they withdraw funds from the annuity account.
Since taxes are deferred until the money is withdrawn, the annuity holder has an additional base of funds accruing compound interest that would usually be paid as taxes on traditionally taxed investment accounts. This means that instead of losing a portion of the annuity’s interest to taxes, the interest remains in the account to generate more interest.
- Feel More Secure With Guaranteed Income
Retirees often rely on a combination of a pension, 401(k) funds, and social security for their retirement income. With a longer life expectancy and ever-increasing costs of goods, many retirees worry that they might outlive their retirement savings. However, a fixed annuity provides the safety and security of a reliable and predictable income flow during retirement. Some fixed annuities have provisions to protect annuity holders from ever depleting their income from the fund, which they purchase as an additional rider on the annuity.
- Fixed Annuities Are Flexible, Accessible, and Easy To Set Up
Annuities are highly flexible and customizable, which makes them appealing to many savvy investors who want more control over their investments. Fixed annuities generally have more liquidity options than other investment and retirement accounts. Annual penalty-free withdrawal provisions and specific riders are available in case of an unforeseen emergency that requires the investor to withdraw funds early. Annuities are easy to set up and investors can purchase an annuity online.
- Funds Are Predictable
Fixed annuities provide a reliable and consistent income, unlike stocks and mutual funds. No matter how volatile the market is, the fixed annuity will still earn its standard guaranteed rate. The investor knows how much income the fund will generate annually, and while this may not be as exciting as the possibility of significant gains, many retirees prefer the stability of the fixed interest rate at the sunset of life.
Fixed annuities provide many values for investors. Many individuals near or at retirement age choose annuities for their predictability, stability, and tax-deferred traits. Consider adding a fixed annuity fund to your financial combination and enjoy the benefits of stress-free investing with a guaranteed rate of return.
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