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You spend the better half of your life working hard, so you can settle into an easy retirement – free of debt and free of burden. Face it – no one wants to be paying back a mortgage or car loan well into his 60s. Retirement is meant to be stress-free – for you to enjoy all the things you sacrificed while you worked professionally. But how can you live a stress-free life? One answer may be annuities – an effective retirement strategy that pays you a steady income – even though you’re not actually working.
What is an Annuity?
An annuity is basically a product sold by an insurance company or other financial institutions in which you make lump sum or periodic payments to the company in exchange for periodic payments (with interest) made to you either starting immediately or from a given time in the future – once you retire. Annuities are most commonly used to plan for retirement or for achieving a future monetary goal.
How Does An Annuity Work?
Annuities are popular choices for people who have a nest-egg of sorts or significant monies over time that they would like to trade that for a steady income with interest being paid on their principal. You make a one time lump sum or regular payments towards your annuity and in turn, it will make payments to you at a future date – either as a lump sum or through a series of payments. This could be monthly, quarterly or annually – depending on your goals and selection. The size of your payout will be determined by how much you have invested, the agreed interest rate and your life expectancy.
If you choose a monthly payout you are basically making a bet with an insurance company or other financial institution that you will outlive their calculations of life expectancy for you. Some Annuity products will offer a principal guarantee which means if you should pass before you’ve used up your principal than your heirs will get the remaining funds.
What Are The Different Types Of Annuities?
There are three main types of annuities that you can choose from:
Fixed Annuity
A Fixed Annuity is one in which you are guaranteed* a periodic payment at a fixed rate of interest. You assume no risk and are assured payment depending on the rate of interest given by your insurance company. Fixed annuities are generally taken when you are about to retire and are looking for a stable monthly or quarterly income. An immediate fixed annuity is one in which you make a lump sum deposit, as opposed to a deferred fixed annuity where you make periodic payments in order to achieve a future financial goal. The deferred annuity is generally used to save on tax. Depending on your plan, these annuities may be for a specific number of years or for life.
Indexed Annuity
An Indexed Annuity is one in which you allow the insurance company to associate your payments with a stock index. Thus, your income will depend on the changes that take place on that particular index. However, the insurance company will assure a minimum payout regardless of the association to an index. This could be a risky proposition since there is no way to assess what will happen with the stock market when your annuity is ready for payout.
Variable Annuity
A Variable Annuity like the name suggests allows you to choose a range of investment options –typically a variety of funds. The money that you put in will rise or fall depending on the performance of the funds – thus this type of an annuity comes with more assumed risk.
How Do I Calculate the Value of an Annuity?
Whether you put in a lump sum amount or make periodic payments, your income will start only when the entire capital amount in the plan has been paid. If you know the capital amount you are investing and the rate of interest that the insurance company is offering, you can easily calculate your return on investment. Fixed annuities are usually easier to calculate since all the conditions are fixed. For other variable and indexed annuities, your insurance company should be able to provide you with information regarding how they undertake annuity calculation methods.
Most banks, insurance companies and financial institutions that offer annuities also provide an annuity calculator, so customers are aware of their payouts depending on the amount they invest – whether looking for monthly, quarterly or annual payouts. An annuity calculator is designed to give you indicative rates without any personal details, so you know what to expect from an annuity. Of course, the financial institution will offer more thorough details once you get in touch with them – based on your specific needs and requirements.
Which Annuity Should I Pick?
l If you are about to retire soon, a fixed annuity is perhaps your best bet. There is no point taking risks this close to retirement. A fixed annuity will ensure that you get a periodic payment at a good rate of interest without the risk of market variables.
If you are planning towards retirement over a period, you should consider putting the amount that you want to invest into a combination of fixed and variable or indexed annuities. This will ensure that you get the interest amount from the fixed annuity, as well as reduce the risk involved with the variable one.
Surrender fees can affect the amount that you invest substantially if not properly planned. So be clear about when you want the annuity to mature and the payments to start coming in. In case you feel that you will need money sooner, you should consider investing some of your amount in a short-term annuity and the remaining money into a long-term one.
If you are nearing old age and choose a long-term annuity plan with a view to supporting your next of kin, choose the plan with the best death benefit. Variable annuities have much better death benefit options than the other types, but with the added risks.
An annuity need may be different for different individuals – it’s time to assess your own personal situation and goals before making a decision on the right annuity product for you. Professional financial planners should be able to give you advice for assessing and making a decision on the annuity product.
Risks and other thoughts about Annuities
Although annuities are simple investment options to pick, there are a few points you must remember before proceeding to invest:
Make sure that your annuity plan has a ‘waiver’ clause. A waiver clause allows you to break an annuity mid-way without paying surrender fees in case of a medical agency or other emergencies. Make sure you read this clause carefully before buying.
You can add a death benefit to your annuity plan. Read the types of death benefits that are available for the different types of annuities. Typically it is more affordable to purchase a life insurance product separately from an Annuity but things always change and it may be worth looking in to.
Remember that the number of payments you choose to receive can directly affect your returns.
You may avail a variety of different clauses/options to add to your annuity at additional fees. Read these clauses and choose the ones best suited to your plan.
Annuities are not FDIC insured but rather guaranteed by the financial institution. That guarantee is only as good as the health of the financial institution you are working with. So, although it seems like a there is no way for you to lose there is. If the financial institution you’ve contracted your annuity with goes under so does your retirement. This is not meant to scare you as there are very reputable companies out there who have been doing this a long time and have a proven track record of managing funds wisely and paying out like clock-work.
An annuity can be a great retirement strategy, but you must research it thoroughly to choose the right product for you. Prudential Annuities been around for a long time and traditionally offer very competitive products. They may be a good place to start looking at what Annuity products are out there. an innovative range of annuity products that will serve your needs well.
Your Financial Advisor should be able to help steer you in a good direction. Just make sure they are not trying to put you in a product that gives them a really high commission but puts you at more risk than you are willing to accept. No one will ever care about your money more than you.
Here’s to your everlasting wealth!!!