Is An Annuity Right For Me?

By Author: Ryan O'Donnell
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When deciding what retirement and investment vehicles are appropriate for you, there are several types of products and special situations to consider. Each savings vehicle or investment will affect your lifestyle during your retirement years, and carries with it specific risks and requirements. Many financial advisors suggest annuities to those looking for an appropriate investment that offers income during their retirement years; however, there are several different types and considerations you should be aware of before choosing one of these products.

What is an Annuity?
An annuity is basically an investment which requires you to provide a lump sum upfront to an insurance company in exchange for a fixed or variable interest rate of return. Investors also have the option to receive income for life when it comes time to start withdrawing, or may choose to receive payments over a set amount of time. The value of the annuity at the time of withdrawal determines the amount of payments received, and some annuities will guarantee a minimum payout. Investors also enjoy tax-deferred interest on these types of investments ...
... which means that the interest continues to grow tax-free until payouts begin.

Benefits of an Annuity
Annuities are often popular among investors who are within 10 years of retirement age, due to the tax deferral advantage. The taxes due on the earnings are not likely to be drastically higher in a short amount of time. Younger investors may not benefit as much from the deferral since the taxes will likely be much lower today than they will be in 30 years.

Annuities also offer guaranteed income for a specified period of time, and are ideal for those who are already retired and want to protect their retirement money while still earning at least some interest in the meantime. This type of investment reduces the volatility experienced in traditional stock market investments but certain subtypes allow owners to still cash in on large gains in the market.

Generally, minimum annuity interest rates exceed those paid by traditional CDs. Annuities are common for those nearing or in retirement looking for a vehicle to rollover their 401k funds into, or hoping to simply protect their retirement nest egg.

Types of Annuities
The major types of annuities include fixed annuities, immediate annuities, equity indexed annuities and variable annuities. Each type offers different risks and benefits to the investor, making some better choices than others, depending upon an individual's personal situation.

Fixed annuities allow you to know exactly how much your money will earn for how long. These annuities present the opportunity for an insurance company to use your money for the agreed upon amount of time, then give you the chance to withdraw your money and interest. Within this category of annuities, there are two different subtypes. A CD Type Fixed Annuity pays a certain percentage rate each year your money stays within the annuity. A traditional Fixed Annuity interest rate may fluctuate according to interest rates at any point in time but still pays a guaranteed minimum rate. Withdrawals up to 10 or 20 percent of your total funds may also generally be withdrawn from a fixed annuity and in special cases, you may be able to withdraw 100 percent.

Equity-Indexed annuities pay guaranteed minimum interest rates but fluctuate based on stock market indices such as the S-P 500. This means that for a lower guaranteed minimum interest rate, you may take advantage of an up market with larger gains, usually up to 8 to 10 percent per year. At the same time, when the market plummets, you have the safety net of a minimum base rate regardless.

Immediate annuities provide fixed rates of interest for as long as you live or for a specified term-whichever is longer. This type of annuity usually will pay a higher rate than a fixed annuity, since payments cease upon the end of the term. A common type of immediate annuity is referred to as a "Life with 10-year period certain" which means the owner receives payments for the rest of his or her life or 10 years. Designated beneficiaries may receive payments if the owner passes away prior to the 10-year mark. Interest rates paid on these immediate annuities vary according to the age and sex of the owner.

Variable annuities are just what they sound like. If you are an investor looking for possibly higher interest rates and the ability to withstand both up and down years in the market, this may be the ideal type of annuity for you.

As with all annuities, seek the advice and counsel of a professional financial advisor to assess your personal situation, needs and retirement goals prior to investing.
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