Immediate annuities were extremely popular in the past but their use has declined dramatically in the last few decades. This type of annuity is a good tool for people who would like to have a specific income over a set number of years. One risks of having a fixed income is that there are no adjustments for inflation or dramatic increases in living expenses.
Immediate annuities could and should be part of a your portfolio but keep their usage to a minimum. Many traditional financial experts believe that 25% to 50% of savings for retirement should be place into annuities. However, modern economists suggest that only 10% to 15% of your retirement fund should be invested in immediate annuities. This is because of the high rate of inflation is not corrected for in annuities as in other types of stock vehicles.
Immediate annuities can also be fitted with an inflation rider. This essential increases your income from 3% to 5% each year.
There is a fairly steep fee associated with an inflation rider and when all is said and done you would actually be losing money in the long run. An alternative is to combine a variable annuity with a For-life benefit. This offers all the stability of an immediate annuity but it allows you to withdraw up to 5% of your initial investment for the duration of your life. This allows the investor to keep up with inflation.
Additionally there is a step up options which gradually increases the amount of income over a period of years, usually 1 to 5 years. This frees up money which can be invested in stocks, and bonds.
Both immediate annuities and variable annuities are guaranteed for life. This means that even if you outlive your principle investment you will continue to draw an income in the same amount.
However, if you pass away before the principle is completely used the excess goes to the insurance company. Another benefit of annuities is that it can be used to fund malpractice cases. Money in annuities is consider insurance money. If you are a doctor, lawyer, architect, or financial planner, the money you place in variable or immediate annuities can not be taking from you.
If you have insurance with a company that is going to go under, annuities are a great option. Money is transferred from the insurance company to an annuity. You will lose money, however the money that was lost can be used to off set future gains in the annuity at tax time.
Annuities are not for everyone. However, if you are looking for a great tax deferment program or just peace of mind for your future retirement, annuities may be just the right security vehicle for you.
Variable and immediate annuities are complex plans. Before deciding to buy either risk, risk tolerance, and goals need to be set. It is always important to have a financial plan before investing in the stock market. Variable annuities are only sold by prospectus which are often misunderstood by the casual investor.
If you are interested investing for your future make an appointment with an experience financial advisor.
