It's never too late or too early to start planning for retirement. Annuities are a popular option with many benefits. You can deposit larger amounts of cash and the growth is tax-free until you withdraw the money. As an investment fund, annuities can be confusing in the first place. The following is a basic guide to annuities for beginners.
What are annuities?
Annuities are a relatively safe investment that promises a stable return. They are regulated by state insurance commissions and by the Securities and Exchange Commission (SEC).
Are there different types of annuities?
Individuals planning for retirement have three main types of annuities to choose from, each with its own advantages and disadvantages.
A buyer makes periodic payments to an insurance company on a fixed annuity. The interest rate on the funds is determined in advance. When it's time for payments to begin, the buyer receives the money plus interest. Payments can start immediately with immediate interest subsidies, or they can be deferred to a specific date months or years in the future and continue to grow through interest with deferred income interest rates.
Buyers decide where they want their money to be invested in variable annuities, usually in mutual funds. This requires some investment knowledge from the buyer. Future payments depend on the results of the investments. Variable annuities provide the opportunity for higher payments, but there is a certain risk. You should also be aware that administration fees, fund fees and certain other fees are deducted from your account. Variable annuities are regulated by the SEC.
This option offers the freedom of variable annuities along with the security of fixed annuities. The interest is based on the market index's results. This is usually the S&P 500 Index (a stock market index that measures the results of 500 large companies on the US stock exchanges). If the market performs well, indexed annuities can offer higher returns, but usually not as high as variable annuities. They are regulated by state insurance commissions and offer guaranteed minimum interest rates (usually between 1% and 3%) as protection against market downturns.
Are there penalties for early sale or withdrawal?
You can buy annuities from fund companies, brokerage firms and certain banks as well as from insurance companies. If you sell your annuity or withdraw money before the payout period begins, you will have to pay capital costs. This can significantly reduce the value of your investment. Talk to our experienced agent for professional advice on buying and selling annuities.