Almost everyone knows that annuities are used to generate income after retirement. Depending on the insurance company you choose, you can increase your retirement income by 20 percent. Besides this, there are many other reasons why you should consider buying an annuity. To help you understand these reasons, this Campjam.org post divides them into two main categories, such as:
Reasons to Buy a Variable Annuity
A variable annuity represents a contract that binds the insurance company to pay a minimum amount at the end of the accumulation stage. The remaining monthly payments typically vary based on the performance of its portfolio. The most important reasons to invest in a variable annuity include:
- Flexible Income: Variable annuities come along with several payout alternatives. By simply choosing specific payment options, you decide how and when you’ll start receiving income.
- Access to Money: A variable annuity allows you to withdraw up to ten percent of the accumulated value without incurring surrender fees. Furthermore, surrender charges are usually waved if the annuity holder becomes terminally ill or needs to withdraw money to move into a nursing home.
- Tax-Free Transfers: This type of annuity guarantees tax-free transfers among different subaccounts. However, you’ll pay taxes on the money you withdraw from your contract.
- Tax-Deferred Growth: Another positive aspect about investing in a variable annuity relates to the fact that you’ll pay taxes only after the insurance company starts making payments. Since this allows your money to accumulate fast, a variable annuity is truly profitable compared to other investment opportunities.
- Death Benefit: Thebeneficiaries of variable annuities receive full account value, with no surrender fees.
To make sure that a variable annuity is the right addition to your retirement portfolio, it’s essential to explore associated Attractions features and costs.
Reasons to Buy a Fixed Annuity
Typically, fixed annuities offer safe, but low, return. Although safety is the main reason why many people invest in these types of annuities, a few more factors can convince you to buy a fixed annuity.
- Stable Rates: These annuities provide clear information about the annual interest rate. Thus, you can calculate exactly the worth of your investment at the end of the accumulation stage.
- Tax Deferral: Specific annuities, such as 401 (k) and IRAs, grow tax-deferred. This means that you don’t have to pay annual taxes on the interest you earn on your investment. Although you must pay taxes on the monthly amount you’ll get from your insurance company after it starts making annuity payments, the tax-deferral feature allows your savings grow more quickly than if they had been taxed right away.
- High Returns: Although fixed annuities usually provide low returns, they can also generate high returns when the bond-yield curve is steep. This happens when short-term bonds (e.g. three-month Treasury bills) pay lower rates of interest than long-term bonds (e.g. ten-year Treasury bonds).
The greatest aspect of investing in an annuity is that you don’t have to pay an annual tax on your earnings. Obviously, the ability of making every dollar invested work for you delivers a huge advantage over taxable investment alternatives. Although annuities are some very potent financial instruments, Career professionals advise people to use them in combination with other retirement income sources (e.g. pension and Social Security plans) to make the most out of them.