Basics About A Fixed Annuity – Why Invest in Annuities for Retirement?
After years of hard work, people want to retire and relax. To make this happen, people need to plan for their retirement years. There are many ways to save for your golden years. Often it becomes confusing and people wonder what choices to make. Find out the basics about a fixed annuity and reasons to invest in annuities for retirement.
What Is a Fixed Annuity?
People looking to save money and earn interest often opt for a bank CD rather than a savings account. A fixed annuity is much like a CD because it pays a guaranteed rate of interest. Often this interest is higher than banks CDs. There are two types of fixed annuities – immediate and deferred. An immediate policy makes fixed payments during retirement. A deferred annuity accumulates based on the rate of return. Because a fixed annuity makes a determined payout, it is a popular choice for retirees who want guaranteed retirement income.
The Benefit of Choosing Fixed Annuities
People on a budget are reluctant to risk their money on a unpredictable investments. While stocks can be part of a retirement portfolio, they are risky. There are winners and there are losers, depending on the amount of risk one takes on. However, a fixed annuity pays a guaranteed rate of interest. It also offers steady, guaranteed income.
Retirees who want to avoid the roller coaster of the stock market with their entire portfolio often choose fixed annuities. An added advantage is the low investment minimum for those on a fixed budget. Some are as minimal as $1,000. And this puts investment within reach for those who are younger and planning for retirement income in the future.
Tax Advantages
The interest accumulated on a fixed annuity is tax-deferred. This means owners (annuitants) do not have to pay taxes until they cash out. There are no 1099s to consider. If someone reinvests, no taxes are due, and compound growth is enjoyed. All of this is appealing to someone who prefers a streamlined portfolio for tax reasons.
However, a high-income earner might be concerned a fixed annuity is ultimately taxed at ordinary income rates as opposed to a long-term capital gains rate. Ultimately, your gains are taxed as income only when you decide to withdraw them. Otherwise they are deferred. Gains in a non-qualified annuity (post-tax accounts) can be deferred for life. In a qualified plan (like and IRA or 403b) they can only be deferred so long. Most qualified account owners have to begin Required Minimum distributions at age 70 1/2.
Most people maintain a diversified retirement portfolio in order to account for their taxable situation. And it makes sense to consult with an accountant who knows the facts about fixed annuities and tax rates based on the individual’s income and goals.
Concerns About Fixed Annuities
People investing in fixed annuities should inquire about the rates, what happens at maturity, and the cost of surrender charges for early withdrawal. However, another advantage is that many annuities permit you to access a percentage of the money each year with no penalty.
Annuity investors must also be aware of inflation. Some annuities offer fixed payouts while others offer increasing payouts based on inflation or other growth metrics. Owners need to consider future purchasing power and the value of the dollar in years to come. And this is much like any other retirement investment. Wise investors consult with an attorney, accountant, and reputable insurance agent to get more answers.
The Bottom Line About Fixed Annuities
Conservative investors like fixed annuities because they provide stability and peace of mind. While there are minor concerns, the bottom line is people will have reliable, safe money for retirement. The sum might be modest but it can still be used to cover expenses and provide money people need during their older years.
If you want to invest in annuities for retirement, consult with an experienced insurance agent. An educated agent can guide you through the process and explain how fixed annuities can help you in retirement.
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Category: Annuities, Retirement Planning