Annuities For Dummies

Specifically the money you invest in an annuity grows tax deferred until you eventually start your withdrawals. Once you start your payments, only the gains you made on your annuity are taxed, and since many of us typically have lower income during retirement, they will be taxed at a much lower rate than it would have been during our working lifetime.

Another obvious benefit of guaranteed income annuities is the guaranteed payments that annuities provide. With all of the turbulence in the economy especially in the last few years a guaranteed rate of return from an annuity sounds pretty good to many investors whose faith was shaken from losses in the stock market. Some of the disadvantages of annuities are that much like a certificate of deposit with your local bank, there are early withdrawal penalties if you are forced to cash in your annuity early.

Typically these penalties are structured in such a way that they are high for the first few years and they slowly decrease over time. Another disadvantage of annuities is that fees typically higher than other investments. Before purchasing any annuity, you need to be sure you have done your homework on all of these fees and be sure that the rate of return you are expecting makes up for any fees you will be charged over the life.

There are hundreds probably more like thousands of annuity companies that sell annuities in all shapes and sizes. Typically any insurance company will offer some sort of annuity package, so if you already have an established relationship with one of them you should look in to their annuity options. With the financial trouble in the market the last few years it is important to do some research in the company you are buying the annuity from.

Since you are relying on them to provide a guaranteed income for the remainder of your life you want to make sure the company will be around that long. The good news is that companies that issue investment options like annuities are rated by companies like Moodys and Standard and Poors for their financial soundness and you can easily monitor any changes in their status. After reading this article you might be wondering if annuities are a good investment.

If you are a risk averse investor who is just looking to hold on to what you have then annuities might be right for you. If on the other hand you are looking to make a significant profit on your investments over time then you should definitely look elsewhere. To learn more or talk to an advisor for free, Click Here. The materials on Annuities Explained's web site are provided "as is". Annuities Explained makes no warranties, expressed or implied, and hereby disclaims and negates all other warranties, including without limitation, implied warranties or conditions of merchantability, fitness for a particular purpose, or non-infringement of intellectual property or other violation of rights.

Further, Annuities Explained does not warrant or make any representations concerning the accuracy, likely results, or reliability of the use of the materials on its Internet web site or otherwise relating to such materials. Talk to a Professional Advisor. Looking for answers but not sure where to start? Everything Else You Need Don't enroll in an annuity program until you've researched your options thouroughly.

How Annuities Work The simplest way to explain how annuities work is to describe them as an investment security that you pay money in to for a set period of time, and once you reach a certain date you start to receive regular payments for a set period of time, often times for the rest of your life.

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Types Of Annuities There are a lot of different types of annuities available and they can largely be adjusted to suit the buyer, but the two most common types of annuities are immediate annuities and deferred annuities. Annuity Payment Types The most common types of payment for annuities are fixed and variable annuities. Annuities Pros and Cons There are a lot of good and bad features of annuities. Are Annuities a Good Investment? Certain companies, at certain times, will offer higher monthly payouts than others. You might also consider whether the carrier is publicly held or mutually owned by its policyholders.

The two business models often have different cultures, different products, and different sorts of relationships with their clients.

As more people learn about these options, I think more people will consider buying annuities. A number of other factors have made annuities unpopular. First, every one of us already owns an annuity. So why buy another one? Second, millions of people, particularly public sector employees, still have traditional pensions. Why should they buy a third one? There are innumerable ways you can use annuities in a retirement income plan. Why is the immediate or income annuity cheaper? The mortality credit is the dividend you earn by pooling your mortality risk with others.

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Second, the income annuity pays out principal as well as interest. When the owner of a deferred variable annuity with a GLWB dies, the remainder of the account, if anything is left, goes to his or her beneficiaries instead of to their fellow annuity owners. If enhancing current income in retirement is your top priority, the mortality credit can be extremely valuable.

The difference reflects the presence of the mortality credit and the fact that each annuity payment includes a portion of the original principal.

5 Myths About How Annuities Work

Risk pooling appeals to many people, because it increases the effective yield of their investment while they are living. Others find the idea of risk pooling — and the possibility that strangers might share their leftover savings — somewhat repugnant. Keep in mind that the longer you expect to live, the more likely you are to be a winner in the risk pooling game.

Health care risk is the retirement risk that Americans worry about the most. Her entire extended family has felt immense financial, legal and emotional pressures.

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In our gut, all of us fear illness, and the potential costs of illness, much more than we fear longevity risk. Generally, we underestimate longevity risk, in part because we regard a long life as a blessing rather than a danger. Inflation risk is also widely unappreciated.

Inflation can halve the buying power of a fixed income over the course of a two-decade retirement. And two-decade retirements are not unusual. Annuity contracts and riders can help you deal with these risks. The guaranteed accumulation features of certain variable annuities can help insure you against sequence-of-returns risk. Many of the latest versions of income annuities offer options that offset the impact of inflation.

Variable Annuities for Dummies: How Do Variable Annuities Work?

Different types of annuities are so unlike that they should be considered entirely different products. To tackle your question: A deferred annuity is, effectively, a tax-deferred investment. There are fixed deferred annuities, which invest mainly in bonds, and variable deferred annuities, where the assets are invested in mutual funds.

For some people, especially those in the highest tax brackets, tax deferral can enhance long-term returns. It refers to the deferral of the decision to convert the contract into an income stream. Owners of deferred annuities rarely convert their contracts to annuities — that is, to an income stream. An immediate annuity or SPIA is an annuity in the traditional or literal sense of the word. Annuities have two primary selling points.

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Second, annuities offer certain tax advantages. They can offer the same or similar tax advantages as employer-sponsored retirement plans or IRAs. But, as is true of many things, the virtues of annuities are also their drawbacks. Annuities cost more than other types of investments. Guarantees are never free, and any contract that offers guaranteed income or accumulation or principal will always carry heftier fees than an investment that requires you to bear all of the risks. Second, tax advantages tend to come with strings attached.

And when you withdraw annuity assets, you pay taxes on your gains at ordinary income tax rates, which tend to be higher than capital gains tax rates, which apply to the growth of assets in taxable accounts. Financial advisors tend to criticize variable annuities for high costs and fixed annuities for low returns or yields.