Investing your money intelligently is a veritable necessity if you want to enjoy financial security in the years to come. However, there are many investment opportunities available for you to consider. You may be wondering what is the best way to allocate your funds to different investment vehicles. Investing in annuities is one option that many people consider. However, you should learn more about this option before you contribute your own funds to an annuity.
Why Invest in Annuities
Before investing in an annuity, you need to know what it is and how it works. An annuity requires you to make an up-front investment of capital but will pay out funds on a regular basis.
The lump sum of money you contribute will be invested on your behalf to generate a reasonable rate of return. You may choose to receive a fixed payment amount or a variable payment amount for a specified term length.
Some annuities are lifetime products, and this means that you would receive payments until you pass away. Others have a fixed term, and you may only receive payments for a specified number of years.
Annuities are a type of life insurance product. This means that they take your age and life expectancy into consideration when determining what your payouts will be.
What Annuities to Invest In
Annuities are often used for retirement planning purposes. This is because they offer a pre-determined rate of return on a lump sum of capital. They take some of the guesswork out of financial planning.
There are several different types of annuities to consider, and you should learn about each one before investing in annuities.
1. Fixed Rate Annuity
This is an investment that has a fixed rate of return as well as fixed payments. The payments may enter your bank account deposit each month, quarter or year.
They give you the peace of mind knowing that you will receive regular income for a specified term length. Or, you could receive the income the rest of your life, depending on which type of annuity you purchased.
2. Variable Rate Annuity
A variable annuity typically has a return that links to a specific index or rate. If market rates increase in the years to come, you may enjoy a higher payout. On the other hand, if market rates decrease, your payout may be lower.
There are typically limits on the upper and lower payout amounts that you may receive. As a result, this could help you to enjoy easier financial planning efforts.
How Much Is an Annuity Worth?
An annuity is an investment product, but it will result in your lump sum of capital decreasing over time. The initial value of your annuity is equivalent to the lump sum that you invested with the life insurance company.
As you receive payments from the annuity, the value of your investment shrinks. However, because your annuity is growing with interest, the lump sum value will decrease at a reduced rate over the years.
How to Invest in Annuities
Investing in annuities is a smart idea for many people, and you may be wondering how you can purchase one. Life insurance companies typically sell these products. Many life insurance companies offer multiple types of annuities for you to choose from.
A smart idea is to use an annuity calculator online to determine how much money you want to invest. Additionally, you could see if your expected payout is reasonable.
Some people will invest the majority of their capital into an annuity. While you will have a steady sum of money in the years to come or throughout your life, this strategy is not always advisable.
For example, you may need access to a lump sum of cash to make improvements to the house, to buy a new car in retirement, to pay for medical bills and more.
You can sell an annuity at a later date to convert it back to a lump sum of cash, but this process comes with fees. It is therefore wise to keep a portion of your money available in liquid asset form.
Remember that the fees and the rate of return on annuities can vary from life insurance company to life insurance company. Comparing products is the best way to keep fees low while maximizing your return.
Also, consider the fact that your expenses will likely rise over the years because of inflation. So, your annuity payout should be sufficient to cover your rising expenses.
Before investing in annuities, you need to understand the benefits and drawbacks associated with this type of investment. The reality is that annuities are a good investment option for most people to consider, but they do have some drawbacks.
When you understand the pros and cons associated with investing in annuities, you can make a wise financial decision as you prepare for the future.
Annuities provide you with a known long-term return on your investment. This eliminates a great deal of uncertainty and stress with financial planning that may be caused by market changes and fluctuations.
By choosing between fixed and variable products and by choosing a desirable term length for your annuity, you can create a payout structure that works well with your current financial plans.
After you set up the annuity, you will not have to worry about monitoring your portfolio or adjusting your investments when market conditions change. This means that an annuity can help you to enjoy retirement more substantially through the elimination of considerable financial concern.
Some people who retire early will use annuity payments as a stream of income before Social Security payments and retirement account payments can be received.
At the end of the annuity term, the lump sum of capital will be gone. Some annuities may continue on with the spouse after the first spouse has passed away, but most annuities are not transferred to heirs. If you pass away very soon, this could be a considerable disadvantage to your heirs or survivors.
The rate of return for many annuities is rather low, and you may be able to beat this rate of return by investing the funds strategically on your own.
Getting a lump sum of cash from an annuity is challenging and expensive, and many people may need access to extra cash at some point over the years to pay for unexpected expenses.
As you can see, investing in annuities makes excellent financial sense for many people, but it may not be right for all situations. Carefully consider the pros and cons associated with investing in annuities. Then, compare these against the benefits and drawbacks associated with other types of investments. You may decide that you can benefit from setting up at least a small annuity. If you have any experiences with annuities or questions about them, leave a message below.