Once you start gathering information on annuity choices, you’ll quickly learn that there are plenty of choices designed to meet a variety of financial goals and retirement needs. There are several factors involved in determining which type of annuity is right for you and we are going to cover the basic decisions and considerations involved when comparing annuities.
Before Comparing Annuities: Do You Really Need to Invest in an Annuity At All?
The first decision you’ll need to make is to determine whether or not you are actually in the market for an annuity. Just because your colleagues, or relatives are pushing the benefits of annuities, remember, their situation may be very different than yours. Everyone doesn’t take the same path to financial freedom or retirement success.
If you are a young professional and just starting to look at retirement options, a Roth IRA, or 401(k) plan may offer you the greatest amount of flexibility, as well as control over your investment. Young investors have plenty of time to ride out market fluctuations and may not be ready to consider annuities. This is, of course, unless you are planning to retire early, or have suddenly come into an inheritance or large sum of money.
On the other hand, for those who have recently received a 401(k) payout or recently retired from a long term position with your employer with a large severance or retirement settlement, you would be the ideal candidate to consider an annuity. Annuities can help you preserve the principle while enabling you to receive a set and secure amount of monthly income.
Okay, once you’ve decided whether or not annuities are truly for you or not, you are ready to begin the annuity comparison process. The first step to this is to decide whether a fixed, variable, or indexed annuity is best for you. These all have to do with the risk factor you are willing to take along with the amount you are looking for in returns.
Fixed Annuities Explained
Fixed annuities have a guaranteed rate of return right from the point of purchase. Under a fixed plan your annuity will keep growing at a safe and predictable rate for the entire time that you own it. As you may have guessed, with such a low risk factor, the return is modest, but security sometimes can outweigh the potential of a greater return. That is for you to decide. A fixed annuity will not be affected by market meltdowns and are especially ideal for retirees who are only purchasing them to guarantee that their savings will outlast them.
If you are in your 50′s, there is another option to fixed annuities. A deferred fixed annuity allows monthly contributions while you are still employed. These contributions are tax deferred and can be rolled over to a nice stream of income once you reach the age of 65.
Variable Annuities Explained
A variable annuity is where the risk potential comes in. Just like a variable mortgage involves the rise or decline of interest rates, a variable annuity works on the same principle. If you are in your 40′s or 50′s and are looking for high return and high growth, a variable annuity may be right for you. You still have time to ride out certain fluctuations without losing money.
For variable annuities, the potential for a greater return is much higher, but there is no shield or guarantee against loss by the insurance company. Instead, you will rely solely on the historical rise and fall of the market along with proper asset allocation.
Indexed Annuities Explained
An indexed annuity is sort of like splitting the first two options down the middle and taking a portion of each. With an indexed annuity your rate of return is attached to Standard and Poor’s Stock Market Index (or possibly one of the other investment growth barometers). An indexed annuity will allow you to participate in the stock market, which generally leads to a larger return, while still protecting your initial investment by giving you a guaranteed minimum return.
Which choice is right for you? Investing in an annuity is a big decision. Do all the research you can and then discuss your options with your financial advisor.
Investing in an annuity can provide you with the type of retirement you’ve always dreamed of, if you make the right decisions concerning your annuities.