Are Annuities A Good Investment?
Those who are in the process of planning their retirement may find themselves asking the question "Are annuities a good investment?" Annuities are investment products issued by an insurance company and are backed by the company's financial strength. Annuities provide tax-deferred income growth. When an individual retires, an annuity offers him or her a guaranteed income stream for a specified period. Annuities also provide a buffer against market downturns as they can grow tax-sheltered until the money is withdrawn.
Variable and Fixed Annuities
Typically, the return on a fixed annuity is a set amount regardless of whether it is in its accumulation phase--when one is adding to the investment--or during withdrawal time. It is for this reason the annuity is referred to as "fixed." It is important to understand, however, that this does not mean the annuity's rate will not vary as time goes by, it simply means that there are certain stipulations concerning how and when the rate can change.
With a variable annuity, one places his or her money in sub-accounts during the annuity's accumulation period. The return of these investments is dependent upon on the performance of the sub-accounts one selects. To make this decision, many individuals seek the advice of a financial planner although this is certainly not a requirement. A person's choice of sub-accounts is usually similar to those, which would be made if the money were being invested in mutual funds.
Owning variable annuities can sometimes be expensive, as one must pay an expense and mortality risk charge, which is typically 1.15 % annually. There are also investment administration expenses associated with variable annuities and these can sometimes be as high as 2% annually. For some, this results in a drag on the annuity's investment return.
Additional Considerations
All types of annuities have surrender charges, which their owners must pay if the money is withdrawn early. In addition, withdrawals made by individuals who are less than 59 ½ years of age are subject to an IRS tax penalty of 10 %. With this in mind, older individuals may find more benefits than younger persons in such investments.
A guaranteed lifelong income is an appealing feature to anyone concerned with his or her financial future. The aforementioned early withdrawal penalties may result in a considerable amount being lost from the principal value. However, if one is confident that early withdrawal will not be necessary, an annuity is one of the best long-term investments available.