Annuities are another way you can enhance your retirement portfolio. They can be an attractive way to ensure a steady stream of income after retirement.
You can set these up through insurance companies by making installment payments to the fund or by paying a lump sum. However, always check the insurance company’s credit rating with Standard & Poor’s and Moody’s before you invest since you could run the risk of losing your investment if the company goes under. Look for a rating of AA- or better.
Also be aware of hidden fees associated with these types of accounts. Make sure they are explained thoroughly and that you understand them before going forward.
You can avoid some of these fees by buying direct-sold annuities from companies such as Fidelity, Vanguard, Schwab and T. Rowe Price. Since they cut out the insurance agent, a lot of the fees are cut out as well.
There are two basic categories offered – deferred and immediate. These are pretty straightforward.
There are also two types to consider within the two categories – fixed or variable.
With the fixed option, you aren’t responsible for choosing the investments. The insurance company handles this for you.
You will choose your investments from options offered by the company. These will usually be mutual funds. Because of this degree of customization, the variable usually carries higher fees than the fixed account.
Like most retirement plans, you'll receive nice tax advantages. The money in the account grows tax-deferred. Only when you begin withdrawing the money will your earnings (not contributions) be taxed at your regular income tax rate.
Your contributions aren’t taxed at all. This is huge because all of your investments minus any fees are working for you.
Unlike other retirement savings options, you won't be restricted by maximum contribution limits. This can be a lifesaver for someone who’s approaching retirement age and needs to play catch up.
However, you should only consider setting up an annuity after you’ve maxed out contribution limits for your primary retirement savings plans such as your 401k or IRA. This is because they typically carry higher commissions and annual fees.
You should also be aware that most annuities have surrender charges associated with them. These are fees for pulling your money out within the first several years after buying in. These fees are in addition to early withdrawal fees imposed by the government.
The fees vary by company but are usually the highest the first year and gradually decrease over the next seven years or so.
Unlike regular life insurance policies, annuities are designed to pay out to the investor and not the beneficiaries. There are options however, that allow designated beneficiaries to receive payments but they have to be specifically requested. If not, upon the death of the investor, the payments simply stop.
Once you reach retirement age, you can choose to have the distributions made monthly, quarterly, annually or all at once. This can help ensure supplemental income so your retirement will be even more comfortable.
Annuities can be a great addition to your retirement portfolio. However, like with any investment, it’s extremely important to do proper investment research beforehand. Talk with a financial planner if you need more direction but always do your own research and most importantly, do what seems right for you.
By following these simple rules, you could be well on your way to a wonderful (and well funded) retirement.From Annuities to Investing Money