By Robert Stitt
If you think you know all there is to know about annuities, you just might be in for a surprise. Not all annuities are created equal. For example, there are annuities that have a single premium and others that have flexible premiums, and interest can be fixed, indexed, or variable. Each type of annuity has its positive and negative attributes.
While most people will benefit from annuities, it is possible that an annuity is not for you based on your circumstances. The most important rule of investing in annuities is “base your investments off of your needs, not anyone else’s.” Annuities should also not be your only source of income for retirement. They should be part of a balanced financial plan.
One type of annuity is known as a Single Premium Immediate Annuity (SPIA). The SPIA is a type of insurance that includes paying the insurance company. In return, you receive, based on the specific plan you choose, income for a set period of time up to, and possibly including, the rest of your life. The benefit of this annuity is that you don’t have to withdraw money from savings accounts, and it provides a set income that does not go down even if the market does. Once you invest in an SPIA you no longer have access to your money so you do not want to put all of your savings into this form of investment.
One of the disadvantages to the SPIA is that once you and your spouse die, the benefits end. These are not monies or benefits that can be passed on to your children or other heirs. There are other annuities that do pay out to heirs if you and/or your spouse dies early, so if this is important to you, you should mention this to your financial advisor.
Another disadvantage to an annuity is that once you buy in, your rate locked. With rates quite low at the moment, it may not be the best time to invest. However, if you do not want to risk your investment income in stocks, getting three percent from an annuity beats the less than one percent for most money market, savings, or checking accounts and CD rates.
If you are at or near retirement age, an annuity is definitely something that you should be considering. You never know how much time is left in the Social Security program and your savings may not last forever. Having a steady stream of income for the rest of your life will make retirement the vacation that it should be.