If you purchase annuities for reasons that align with your financial objectives, they may be a good way to invest your money. Annuities can be purchased for security, long-term growth, or income. For instance, a fixed annuity rather than a CD with low-interest rates may be a good low-risk choice. A tax-deferred variable annuity could be obtained for long-term growth. An annuity that will provide you with income in the future is an option. The insurer that issues the annuity will provide some level of outcome guarantee in each of these scenarios. The amount of income you can receive from an annuity in the future is frequently guaranteed. Having a plan is the only real way to determine if an annuity is a good option for you. Your financial goals should be determined by your plan, which should also direct your decision-making toward achieving those goals. An annuity might be a wise choice if you want to, at least in part, guarantee the results of your financial investments.
Main points
- A certain amount of retirement income can be guaranteed by purchasing annuities, which are insurance products.
- When you understand how they relate to the rest of your retirement objectives, they may be a wise purchase.
- Make sure you are aware of the costs and the amount of money you will receive from an annuity before purchasing one.
When Annuities Are a Smart Investment
A product of insurance is an annuity. In other words, you purchase it to lessen some of the risks associated with making an investment. Some annuities, such as variable annuities, provide customers with a selection of stock and bond portfolios as investment options within the insurance contract. While some are investments, others are real insurance. Even though it sounds strange, an annuity is good at one thing. It can act as a buffer against the risk of living much longer than you anticipated or "longevity risk." The purchase of an annuity may be a wise financial decision if that is your motivation. If you are aware of your retirement objectives, an annuity might be a wise choice for you. Additionally, you should be able to understand how the annuity aids in the achievement of those objectives and the costs and limitations associated with the potential purchase. You should be aware of the investment options available, how the annuity interacts with other investments you own, and how annuity income is taxed when payout commences. The SEC regulates annuities, which must be sold by licensed representatives. Agents are compensated for recommending these products to their customers.When to Avoid Investing in Annuities
Proceed with caution if you are being sold an annuity without having had the chance to consider your entire financial situation. Some of the people who sell them might have good intentions but may not fully understand the goods they are offering. They might not understand the tax issues very well. Additionally, they are unable to see how that product would fit into your retirement plan if they haven't done any planning for you. You should also be aware of the annuity's associated fees. Your returns will be reduced by high fees. In the majority of markets, your purchase will generate low returns due to some annuities' high fees. A plan must be in place before purchasing an annuity, and you must understand how it fits into that plan. There is no need to rush into purchasing an annuity before doing your research because annuities are here to stay. Some salespeople will inform you that a particular annuity product will only be available for a brief period of time. This might be accurate given that insurers occasionally stop selling some of their goods. However, don't let this fact force you to decide before you're ready. You'll probably be able to purchase a product with characteristics similar to the previous one.Not All Annuities Are Created Equal
There are many different annuity types, and each has advantages and disadvantages. You'll be able to ask the right questions about any annuities you might be considering purchasing once you are aware of the types that are being sold. Before you purchase, compare the no-load annuities to those offered by brokers. An individual with an insurance license and possibly a securities license will sell annuities that are broker-sold. A company that sells no-load annuities is where you purchase them. They charge less, but you still need to do your homework and ask questions. You should be prepared to put in some extra effort if you want to pay lower fees. If it fits with your plan, some financial advisors who charge a fee will also assist you in choosing the best no-load annuity. Before making a decision, do some research and educate yourself on alternative future investment strategies. Additionally, you should feel at ease enquiring about annuity fees. Before continuing, you should also be happy with the responses you received. Before you make a purchase, any sincere advisor should walk you through every cost in order to help you choose the best product. Avoid buying from an agent if they are in a hurry or unable to take the time to explain the costs associated with their product or to disclose to you how they are compensated for the sale of that product. Tax, investment, or financial services and advice are not offered by The Balance. The information is provided without taking into account any specific investor's investment goals, risk tolerance, or financial situation, so it might not be appropriate for all investors. Risks associated with investing include the potential loss of principal. Investors should think about hiring a financial expert to help them choose an appropriate investment, tax, and retirement savings strategy.