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The Pros And Cons Of Annuities

Todays Date: October 20, 2018

Most, if not all people look forward to retirement. As part of this anticipation, people make it a point to make investments that would secure their future especially during their old age when they are no longer capable of earning for themselves. Other than the stock market, one investment that people venture into is annuities.

What is an annuity?

The word annuity is often used as reference to the income that is generated from a capital investment that is paid in installment or full over a period of time. Annuities are very important part of planning for retirement, as it will give you protection and financial stability even when you are no longer working.

How does it work?

There are several types of annuities. The most common are the fixed annuity and the variable annuity. The fixed annuity is the safest type where everything from your interest rates, premium and paycheck at the end of your payment term is fixed. On the other hand, a variable annuity is riskier as it involves higher risks in terms of the interest rates, premiums and paycheck. Variable annuities have bigger chances for growth but also entail a significant amount of risk. Before you make any investments, you should understand the different types of annuities and the pros and cons of each. This is especially helpful as most of the time, agents selling annuities only focus on the advantages and leaving out disadvantages for you to find out along the way.

Benefits of annuities over other investments

Different people invest in annuities for different reasons. This type of investment have various advantages that are attractive to those who are preparing for their retirement especially those who do not want to risk losing their savings over unstable investments such as stocks. If you invest in an annuity, you are guaranteed a fixed amount every month for as long as you live. If you are worried about the effects of inflation on your future earnings, you have the option to make your annuities inflation proof by paying a little extra. You can customize your annuity so that it will keep up with inflation; your paycheck will match the cost of living by the time you are receiving the income from your annuities. On top of all these advantages, annuities are backed by the state fund guarantee so you do not have to worry if ever the company becomes bankrupt and is not able to pay as your investments will not go to waste.

Downside of annuities

Annuities are not fool proof and they also have their set of drawbacks. Annuities are not as flexible compared to other investment options in the market. As they are intended to give steady income during retirement, they cannot be utilized in times of emergencies. If you withdraw your annuities earlier than what is stated in your contract, it is subject to a tax penalty of up to 10%. It also requires a long time and significant amount to be invested in order for the annuity to be beneficial. As annuities are oftentimes fixed, you are foregoing the opportunity and chance at a higher return of investments that you can otherwise get if you invest in other assets that fluctuate in value like stocks. It is very conservative so you will not see the losses and gains just like in other riskier investments.

There are many reasons to look at the pros and cons of annuities, from supplementing income to using for your retirement: http://www.annuities2day.info/ar/pros-and-cons-of-annuities.php.

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