Annuities are one of the least understood investments. Some investors think of retirees when the word “annuity” is mentioned. Others think annuities tie up their money and force them to forfeit control over their investment income. Others still think of a risk-free conservative investment that produces a reliable stream of revenue. None of these assumptions are entirely correct. Let’s take a look at the benefits and drawbacks of annuities, an investment that is mired in misinformation.
Often associated with retirees, the right annuity can benefit investors of all ages.
Annuities Come in Different Shapes and Sizes
Annuities tend to elicit three reactions from people:
- I love annuities!
- I hate annuities!
- What’s an annuity?
As discussed in the article “Annuities Pros and Cons: Are they More Good than Bad?,” there is no one single kind of annuity for investors to love or hate.
Fixed annuities, for example, pay a predetermined – or fixed – amount of income that never changes. Variable annuities could pay out more or less, depending on market performance. Immediate annuities come with payments that start right away. Deferred annuities, on the other hand, cost less because they don’t start issuing payments until a set period of time after purchase. This gives the issuer time to invest the buyer’s payment, which makes deferred annuities cheaper.
The Best Annuity is the One That Matches Your Goals
Each category of annuity comes with options within the option. Investors should leverage these secondary options to tailor the annuity to their specific targets, whether they’re investing for education, retirement or a vacation the following year.
Single annuities, for example, stop making payments when the purchaser dies – even if there is still money left in the annuity. In the case of joint annuities, however, a surviving spouse may continue to collect the payments even after the death of the purchaser. When you purchase an annuity in a lump sum, you can collect right away. When you make payments on an annuity, your installments come later down the road.
Like any other investment, there are pros and cons, benefits and drawbacks to annuities. Some investors are turned off by annuities because they tie up your money and often come with steep penalties for early withdrawal. Other investors worry that the annuity may outlive them and that they could wind up forfeiting their hard-earned cash to an insurance company.
Those who find annuities to be a good fit, however, are attracted to their simplicity and longevity, the options they provide and the lifelong income that is the foundation of their legendary stability.