In this era of low interest rates, Annuities have been promoted as a simple solution for those individuals who seek to have a steady source of income, particularly during their retirement years & when other sources, such as Social Security, might not be sufficient to meet such individuals’ needs.
Here we’ll discuss what Annuities are, why they can be useful, and the pros and cons that you should weigh when deciding whether to buy an annuity.
At the RVW Wealth, we are focused principally on the management of highly-diversified Equity portfolios for long-term growth with a Fixed Income component as needed for nearer-term liquidity needs. With this said, annuities can come into play in some cases. Every person is different and living in different circumstances. Depending on these circumstances, you may either be a candidate for annuities or not.
Basics of Annuities
First off, Annuities a product created and sold by insurance companies. These are planned according to the clients’ needs, and their basic aim is to protect you from the fear and unfortunate events of outliving your income. It provides a platform for you to have a monthly stipend even when you retire.
The methodology is simple; the money you contribute in purchasing this investment plan is annuitization and changes them into periodic payments that can last for a lifetime. This seems like a jackpot, but the initial payments of this annuity plan cost more than you can imagine. With bigger payments, you can enjoy better investment plans. That is why people who are about to retire and have a sum of savings already can use it to get such investment plans and live a stress-free retired life.
Various Payment plans
When it comes to payment plans, the insurance companies make sure there is a plan for everyone, as not everyone can afford larger amounts but everyone needs and desires protection. Therefore there are two basic types of annuities that are provided at insurance companies:
- Immediate annuities
The immediate annuity plan is the simplest and most advised. It has no hidden charges and no hidden paperwork. The insurance company takes your money and invests it for you, which allows you to have a stable payout for a given period.
The immediate annuity requires the payment to be made in one sum. There are no installments for this plan, and you can pay the amount immediately or at a set date in the future. After the investment, your interest is generated within a year, and you can start withdrawing it. The plan can be for a duration of a minimum of five years or a lifetime. For this reason, many clients opt for immediate annuities and start their payouts for a backup stipend.
2. Deferred annuities
Think of it as like a savings account or a piggy bank that you break open at a specific time in date. The deferred annuities are contracts made with the insurance company just as with immediate annuities. While the contact holds your details and the market you want to invest in, it also holds a specified date in the future that marks the start of your regular payouts.
Many people in their youth opt for this investment plan and delay the date of their payouts to have a regular payout after their retirement. It protects your retirement life so that you do not have to worry about a stable income. The interest is tax-deferred, and you do not have to pay any extra tax when you withdraw the money.
Various Annuity Types
For different clients and their different circumstances, there are different types of Annuities planned. These annuities serve as a long-term investment plan that leads to a monthly stipend for the rest of your life. Depending on your choice and needs, the experts will help you find a proper annuity plan that will serve you well.
- Fixed Annuities
The company that provides you with these fixed Annuities will back your payments in any case. These annuities guarantee a steady interest for a set period. The stipend can fluctuate depending on the anniversaries and other unplanned reasons. In a fixed annuity, the client cannot lose money no matter what the circumstance. It is a fixed buy and sell rate; you contribute to an annuity over a set period and get a minor increment of the interest regularly for a set period. There is no loss in a fixed annuity as there is no investing in other markets. They do not participate in any index or market performance.
So if you are looking for a clean investment or long-term protection of yourself and your beneficiaries, This annuity plan is the simplest and the most trusted to go with. You will have a relaxed and well-protected retired life ahead of you.
2. Fixed indexed annuities
A more favorable option for people looking for chances for professional and business growth on a basic level. The fixed indexed annuities use the index and market performance to provide an interest based on the market index, such as the S&P 500. In such an annuity plan, the insurance company does not directly invest in the stock market and preserves the premium. They provide principal protection in the down market and a better chance at growth. This type of investment plan is long-term and is tax-deferred. Clients enjoy less risk and more potential growth. The potential growth is more than the fixed annuity but a less potential return than the variety annuity.
Depending on your choice of the investment plan and the sum of money you are ready to invest. You can opt for this long-term investment plan for a better retirement ahead.
3. Variable annuities
Variable annuities are very different than the fixed annuities that give guaranteed payouts. With variable annuities, you pay an amount entirely either immediately or at a date set in the future. This allows the insurance company to invest on your behalf in the market that you choose.
This annuity is variable as the payouts are variable depending on the interest that your chosen market generates. Though the payout is not guaranteed, and you may lose money in the process, the potential of growth is far greater. People on a short budget should not opt for this payment plan, but if you have some extra sum that you can save for your retirement, there is no harm in investing with a suitable market.
There might not be an interest generated, but you will still have your sum lent out to you over some time; this annuity is tax-deferred, and you will have to pay no tax on the payouts until you withdraw them.
Advantages of getting Annuities
After getting into all the details of different annuities and their types, it is well understood that annuities serve different individuals and their specific situations. For those who are eligible for an annuity plan, the advantages are;
- Steady pay
The most prominent and promising feature of annuities is that they offer to pay like regular stipends. These payouts are stable and can range from a minimum of five years to a regular lifetime stipend. Which helps protect the clients after retirement monthly costs.
Different investment plans by annuities provide different capital protection, such as medical protection, etc. This helps keep your money in a safe and valuable investment providing aid and protecting your health at most.
3. Tax benefits
Another very prominent feature of these annuities is their tax-deferred nature. You will not have to pay extra tax on every payout. In other words, the interest generated on your contribution will be tax-free until you withdraw them.
4. Principal amounts
Maintaining the amount that you have invested at any cost is the characteristic of an annuity. It helps protect your total amount and not let it go below the initial amount. If the interest is generated, the amount might increase but never decrease.
Shortcomings of annuity plans
There are always ifs and buts to every plan, and the same is the case with annuities. They are very advantageous on many occasions, but they will have some loopholes that may have disadvantages. These pros and cons must be looked up before going with any annuity plan. Some of the Cons of annuity plans are;
Withdrawing your sum of contribution before the said time is not allowed, or liquifying your annuity at a premature time is almost impossible; it costs the client strict penalties and charges. These are often known as Surrender Charges.
2. Opportunity Cost
Other market-linked plans provide a much higher return, but an annuity interest return is much lower than any other index. This is one of the major shortcomings of annuity plans.
Applying for a said annuity plan costs a sum of contribution immediately or over time; these contributions can be quite large and need extra input as it is a retirement fund.
Annuity plans are thoughtful strategies for making a retirement plan, but the experts advise other long-term investment plans in most cases. Here at RVW Wealth, we generally believe most clients can achieve their long-term financial goals by investing in traditional stocks and bonds, but annuities can be appropriate in certain situations. Please feel free to discuss with us if you believe annuities may be right for you.
September 29, 2021