Creating a solid financial plan is one of the best ways to make sure you’re able to sustain your lifestyle after retirement. Annuities, in particular, are one of our basic services that you should consider, and here’s why:
What is an Annuity?
Basically, an annuity is an agreement between a client (annuitant) and an insurance company wherein the annuitant pays the company for a guaranteed interest or income in retirement for a set period of time. Some companies also provide options for a guaranteed income for life after retirement. Hence, annuities work like traditional pension plans, where the difference is it is funded by the annuitant himself instead of by the company he works for.
An annuity also allows your money to grow tax-deferred during its accumulation phase. This means that the contributions are not taxed upon payment, but only upon withdrawal years later during the income phase. Furthermore, such annuity services feature a death benefit that will make sure that beneficiaries are guaranteed a minimum amount after the annuitant passes.
All annuities involve a number of fees and charges based on certain factors. These factors include the act of withdrawing funds before retirement.
Types of Annuities
There are three kinds of annuity products you can choose to create a solid retirement fund. Each is designed with different features that can appeal to your investment strategy:
- Fixed Annuity – this product is best for individuals who seek maximum protection from stock market fluctuations, and prefer to know exactly how much interest and income they receive. These earn steady interest over a specified period of time.
- Fixed Index Annuity – this type of annuity shares the same level of protection as a fixed annuity but with the possibility of an increase in interest over time. The increase will depend on positive changes in an external index. Considering that this product doesn’t initiate participation in the market, there is a limit to how high interest rates can rise.
- Variable Annuity – is the riskiest, yet most rewarding of all types. This is because its growth depends on where you invest your funds in the market. Optional riders are usually used to reduce the risks of participating in the market.
Riders are extra features annuitants can add to their retirement plan for better annuity rates and a more stable and protected fund.
he match covers a certain percentage of your contribution—say up to 6% of your salary—it makes sense to put in at least 6%. And if there’s a limit on the dollar amount that your employer will match in any single pay period, you can spread out your contribution over the year so that you qualify for the maximum matching amount. Your employer should tell you what level of contribution to make and over what period of time, to maximize the benefit.
Annuity buyers have options.
Whether you’re in the market for an immediate annuity or deferred annuity as part of your retirement planning; you can take a similar approach in identifying the salesperson you’ll be comfortable working with, selecting the specific annuity contract you’ll buy, and deciding on the investment portfolios into which you want to put your money.
Your choice of annuity contract will depend on where you buy. A direct seller, such as a mutual fund company, may offer only its own products. A brokerage firm or bank, on the other hand, usually has business arrangements with a number of different annuity companies. Typically, you’ll have access to a wide range of features available in different contracts.
Registered representatives who sell annuity contracts are either affiliated directly with an insurance company or with an independent broker/dealer.
Where the Money’s Going
In choosing among the portfolios available in variable annuity contracts, according to NAVA, buyers overall allocate slightly more than 54% of their assets to equity portfolios and an additional 8.5% to balanced or asset allocation portfolios, which themselves typically own at least 50% equities. While equity portfolios can be more volatile than fixed accounts, they are able to provide inflation protection and long-term growth potential—primary goals of retirement investment plans.
How to Get Started
Remember, nothing has to be done on the spot, so you don’t have to feel pressured to act immediately. The written information you’re provided—for example, the prospectus—should answer the questions you have.