If you’re looking for a minimal-risk investment that can balance your retirement plans with guaranteed income, an annuity may be right for you. Annuities offer many benefits, including high returns and tax-deferred savings. Find out what an annuity is and how this investment tool can help you plan for retirement.
What Is an Annuity?
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An annuity is an investment product that produces guaranteed monthly payments once you reach retirement. How an annuity works will depend primarily on the type of annuity you purchase. Investing in an annuity involves making a single payment to the insurance company to purchase the annuity. In return, you receive an annuity contract, which includes information about your investment, including at what date you’ll begin receiving payments, for how long, and the interest rate you’ll earn.
6 Ways an Annuity Helps You Invest for Retirement
An annuity can help you invest for retirement in a number of ways. Here are a few advantages of using annuities for retirement planning.
Earn Guaranteed Income on Retirement Savings
It’s estimated that as many as 55% of Americans aren’t properly prepared for retirement. Many people are unable to estimate how much they’ll need once they reach retirement. Additionally, Social Security and pension programs are less likely to be available to current generations planning for retirement and inflation is at record levels.
Investing in annuities is one of the best ways to supplement other retirement accounts, including a 401(k) or Roth. Unlike other traditional retirement accounts, annuities provide guaranteed monthly income. Annuities are a great way to counter inflation by earning a higher return that helps you keep up with the increasing cost of money.
Take Advantage of Tax-Deferred Savings
Another important benefit of annuities is that they offer tax-deferred savings benefits. You won’t have to pay any taxes on your earnings until you actually withdraw them. By the time you reach retirement age, your income will likely be lower, which may even put you in a lower tax bracket when it comes time to pay taxes.
Lower Risk Tolerance
Very few investment opportunities carry little to no risk. Certain annuity types, however, carry very minimal risk. When you invest in a fixed annuity, you’re guaranteed to earn a certain payment amount once the annuity matures. Because fixed annuities aren’t dependent on the stock market’s performance, you can rely on receiving this money.
Ultimately, your risk tolerance depends on your preferences and existing retirement investments. Many experts recommend adjusting your risk as you near retirement age. The younger you are, the more time you have to plan for retirement and, thus, the more risk you can accept. As you near retirement, your risk tolerance should decrease, and annuities fit right into this plan. Even younger investors can benefit from the certainty that comes with annuities by using them to balance out an investment portfolio made up of riskier stocks or investments.
Receive Higher Returns
Despite the lower risk threshold of annuities, they still offer decent interest rates. The interest you can earn through an annuity is often much higher than what you’ll receive by leaving your money in a savings account. Annuity interest rates may even be higher than Certificates of Deposits (CDs). If you have funds you can tie up in an annuity for a few years, you can earn a lot more than simply using a savings account or CD.
Increase Your Financial Wealth
Annuities also allow you to increase your personal wealth and help your heirs. Some annuity contracts have survivor options, which means that even if you don’t live out the full terms of your agreement, your survivors will receive your monthly payments. Another advantage is that death benefits built into annuities don’t typically require probate. This means your beneficiaries will begin receiving payments without having to go through lengthy probate hearings.
Earn Based on Your Financial Goals
Everyone’s retirement plans look different. Some people may dream of downsizing and spending time with family. Others may plan on traveling the world after they’re no longer held down by work responsibilities. Reviewing your financial goals is important to ensure you’ll have the funds you’ll need.
Once you have an idea of your preferred lifestyle, you can choose an annuity contract that helps you meet those goals. For example, annuities can offer you consistent monthly payments for an extended period, or you might opt for larger monthly payments for a shorter period. Either way, few retirement planning tools allow you to customize your payments as easily as annuities do.
Adding an annuity to your retirement portfolio ensures guaranteed income that helps with inflation. With minimal risk and competitive interest rates, annuities are a great way to balance out an investment portfolio while ensuring you have the funds you need for retirement.
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