When choosing retirement investment options, many Americans choose Annuity Insurance as a significant part of their portfolio. Annuities can be a safe way to protect your principal, and receive a decent return on your investment in regular intervals for a set period of time, or for life. They are tax deferred until the time of payment. There are many nuances, or choices that come with different annuities regarding payment schedule and length of term. However, overall we can segment annuities into three main types: Fixed Annuity, Variable Annuity, and Index Annuity. What Annuity is right for you (if any) depends on your specific family and financial situation. Each type comes with differences in risk and return, and we will explore them here.
Fixed Annuity
A Fixed Annuity is the safest type of Annuity. With it the investor receives protection of the principal and a guaranteed minimum rate of interest. They are similar to Bank CD’s, but geared more towards retirement and with higher liquidity. Usually the investor can expect an interest rate between 3-10%. This Annuity is purchased with a single up front premium, and usually ranges from 1-10 years. The longer the Annuity, often means the higher the interest rate offered. This is often the ideal annuity for investors already in retirement.
Variable Annuity
A Variable Annuity is more flexible than a Fixed Annuity, with a higher potential return, but more risk. It provides you with the same tax deferred benefits. Variable Annuities can differ in many ways from provider to provider, but the following statements are generally true.
Variable Annuities can be purchased with an initial lump sum, or can be invested into over time, with as many payments as the investor would like. With this type of Annuity you are able to invest in stocks and mutual funds. Obviously, this can affect the monthly payments you receive. The additional amount of risk in this type of annuity is up to you, dependent on the types of equity you choose to invest in, however they usually come with a Fixed option, still allowing you to switch to the safer route, at any time. This is often the ideal type of annuity for investors with some additional years before retirement, as it allows for higher growth of savings.
Indexed Annuities
Indexed Annuities are in between Variable and Fixed. With an Indexed Annuity, the interest rate you receive is tied to the performance of a major stock market index. Indexed annuities provide minimum guarantees for credited interest and income, and are therefore safer than a Variable Annuity, while still providing the opportunity for higher returns than a Fixed Annuity.
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