Many Americans wonder how to best invest their money for the long-term. Annuity insurance is one option consider, an arrangement in which an investor makes an upfront, or ongoing payments, and in return receives return payments of principal and interest for their retirement. Return payments can be for a period of time or for the life of the investor.
Annuity insurance is used for retirement. There are a number of benefits to annuity insurance, but the often most noted benefit is that annuity investments are tax-deferred by the government. You are able to invest as much as you’d like in annuities (unlike 401k’s) and you will not pay taxes on gains until you start withdrawing your investment.
The most purchased type of annuity is a fixed annuity. A fixed annuity is known as the safest type of annuity insurance, providing a guaranteed protection of principle as well as a secured interest rate. It will provide, “fixed” payments at (usually) monthly intervals during the recipient’s retirement.
A fixed annuity provides retirees against the risk of receiving a negative gain on their retirement nest-egg as well as the stability of set payment intervals. A fixed annuity covers investors from market fluctuations and often provides more than a moderate return when considering the tax benefits, combined with the interest rate received compared to other low risk investments such as Government Bonds or CD’s.
Fixed annuities can further be segmented by their payment schedule. An immediate fixed annuity provides immediate payments to the holder, as soon as the investment was made. In the US, annuity insurance investors cannot receive payments until the age of 59 and a half without penalty. Therefore immediate annuities are often used by investors already in retirement.
A deferred annuity is the only option available for investors below 59.5 years of age. This annuity gathers interest on money invested at the pre-agreed fixed amount for a number of years until the owner is at 59.5 years old. No tax will be paid until withdrawals are made.
Although there are many reasons to consider a fixed annuity as part of your retirement investment portfolio, it does have its own share of drawbacks, and don’t let anyone tell you differently. One issue with annuities is a lack of liquid capital. Money invested into fixed annuities can be withdrawn before the age of 59 and a half, however, not without penalty from the IRS, and possibly an additional penalty from the insurance provider. Always consider your financial position before investing.
This article is an overview of a fixed annuity, but it is nowhere near a complete assessment. Always consider the financial implications, and your personal situation before making a decision on any investment or insurance product.
John C. Ryan writes content regarding annuity insurance, attempting to provide retirees with the information they require to assess their fixed, variable, and index annuity options.