If you are looking for another investment option in order to boost your financial status when you come into retirement, an annuity might be worth looking into. Like any investment, there are setbacks to purchasing an annuity, but because there are so many different types, you are bound to find the right investment option for you.
What are annuities? These are an investment option usually purchased by people later in life who are looking for a better option to manage their income during retirement. It may be difficult to qualify for buying annuities, but once bought, owners have a unique commitment to their purchase, with almost all (93%) stating they still own their first one.
Do you qualify? Generally, those with a significant amount of cash available or have a large amount of cash stored in other investment accounts can purchase annuities. Eight out of 10 people do not qualify for an annuity due to their household incomes falling below $100,000.
If you believe you qualify for an annuity, consult your financial adviser about what type of annuity to purchase — of which there are five to choose from.
- Fixed Annuities: These act like CD investments and are issued by insurance companies. They pay a guaranteed rate of interest and can be deferred (activated later in life) or immediate (payout starts as soon as you complete the purchase). This option is best for retirees who want a steady stream of income.
- Variable Annuities: Also tax-deferred, this type allows you to choose from a variety of investments. Once you’ve chosen an investment option, the annuity pays you a level of income based on how well the investment is doing. These aren’t good for meeting short-term goals because taxes and insurance charges may apply if you withdraw early.
- Equity-Indexed Annuities: This is a combination of fixed and variable annuities. There is a guaranteed return, which means it is a low-risk appeal for many. The rate of return is usually from 2 to 3%. However, you can gain if the stock market rises because this type of annuity is tied to the market performance.
- Immediate Annuities: These are just like a life insurance policy. In this case, you give an insurer a lump sum of cash in return for regular income payments until your death. These start paying out as soon as possible.
- Longevity Annuities: These ensure you don’t outlive your monetary payments. This is not an annuity lump sum payment, but instead requires you to wait to receive payments until you reach 80 years old.