Annuities offer steady income with low risk in retirement and are sold by insurance companies. An investor deposits money with the insurer who invests and returns it via a series of regular payments through one of the following:
- Variable annuities – allow investments with different levels of risk and returns based on the performance of the investments.
- Fixed annuities – guarantee the principal investment and earnings with a fixed payment for the length of the contract.
- Fixed Indexed annuities – provide returns on your contributions based on a securities index such as the S&P 500.
- Immediate annuities – generally are purchased with a lump sum and deliver a guaranteed income right away.
- An investor may also want to consider a Charitable Gift Annuity which allows a tax deduction calculated by taking the full amount of the annuity contribution and subtracting the current value of the lifetime payments that are scheduled.
The primary benefit of an annuity is a tax-deferred stream of income. For a person nearing retirement age who is suddenly in possession of a large lump sum from an inheritance, sale of home or divorce proceeds, an annuity may well be a wise choice. Annuities are also commonly used in trusts to defer taxes for designated beneficiaries. The secondary benefit of an annuity is the lowered risk, attractive to many who spend sleepless nights worrying about their investments.
Ironically, that is also one of the main downsides of an annuity: it may not reflect the gains that are being made in a thriving market. The fees associated with annuities, along with the fact that annuity investments are not liquid, also may deter some investors.
Annuities are strong tools as part of a portfolio or even as the main stay of a portfolio, depending on the investor. There is a wealth of information on Annuities out there and would be annuitants are advised to educate themselves individually and with the advice of their tax and financial advisor.