Most retirees or those about to enter retirement have at least one (if not all) of the following concerns:

1. Protecting their savings
2. Creating and protecting their retirement income stream, and
3. Protecting their heirs.

 Roll these concerns all up together and we see that the underlying issue is risk management. Invested properly, annuities can be a significant anecdote to these problems, especially for retirees.  An annuity is an investment designed for retirement. It is a written contract between you and an insurance company. The contract allows you to potentially accumulate funds and then provide lifetime income payments.

 Fixed, Immediate, or Variable: Which Annuity is right for you?

 There are two main categories of annuities immediate and deferred. Within each of these there are two sub-categories, fixed and variable.  

Fixed Annuity:

 With a fixed annuity, you invest your capital with an insurance company which promises to pay you interest and return your capital at an agreed upon future date.  Just like a bond or C.D.  

The safety has to do with the rating of the insurance company, once again, much like a bond, make sure the insurance company you are using is rated ”AA” or higher. Rule of thumb: Invest in the best. After all, we are choosing this investment option for the safety. Do not compromise of this issue.

Fixed annuities, like all annuities offer the advantage of tax-deferral. You will be required to pay taxes on profits when you withdrawal the money at ordinary income tax rates. If you choose to reinvest, current tax will not be owed. This must be considered when comparing the rates on fixed annuities as compared to other fixed income investments. And that’s exactly how you should approach this investment choice. Shop and compare before you buy!

Know also that the choices of rates and maturities vary from company to company. Consulting a financial advisor before making your final decision is, as always, prudent since they should have access to many insurance providers and that will make it easy to quickly compare current rates.

Immediate Annuities

This type of annuity is a fairly straight forward investment choice. You turn over a certain amount of your money to an insurance company which in return agrees to pay you a certain amount of money for a specified period of time or the rest of your life.

Once you invest in an immediate annuity, the insurance company keeps your principal. It is not returned to you at any time. You give up the rights to your money in turn for an income stream. It is not given to your heirs either.

So when investing in an immediate annuity, be sure to live a very long time. It will drive the insurance company crazy! Knowing when you will die is the only true way to know if this choice is right for you.

The immediate annuity rate an insurance company quotes you fluctuates from week to week, just like the rates on a C.D. One week an investment in an immediate annuity may net you $1000 per month, and the next week $950. So the direction of interest rates will affect the timing of when you should purchase an immediate annuity. Once you buy it the rate is set for life so you may not want to invest your capital all at once. Spread your purchases out a bit especially when rates on moving higher. 

Immediate annuities are becoming more popular as retirees look to supplement other sources of income like social security and pensions. They want to know that check is coming in month after month, year after year no matter what.

Variable Annuities:

In the first two examples, the investor knew ahead of time, at a minimum, what the return and income stream would be. When investing in a variable annuity, the return is variable and unknown.

When you purchase a variable annuity contract, your money is invested into sub-accounts. These sub-accounts are like mutual funds. They are professionally managed and invest in stocks, bonds and a wide variety of other market sectors. .

You may choose the sub account(s) you prefer just as you may choose a mutual fund. If they do well you will have more money in the pot, if they don’t you will have less.

The variable annuity does offer a guaranteed income payment based on your initial investment but the goal with a variable annuity is to grow you capital to a higher level which, at some point you can turn into a larger income stream.

The primary difference between a variable annuity and a mutual fund, aside form the tax deferral advantage of the annuity, is that you can also purchase guarantees, called riders, to protect yourself against potential declines in you annuities value. There are, however, many different types of riders. Consider them carefully before making a purchase as each adds an additional cost along with the benefit. For more information on riders, visit www.livelongliverich.com.