When it comes to retirement income, considering annuities as a strategy makes a lot of sense. The annuity rates are crafted to deliver frequent infusions of cash to you automatically. However, having misconceptions and making mistakes while investing in annuities can be costly. A wrong decision can easily hamper your financial security.
Annuities have had a long conception of being sold and not bought. For many years, the approximately $2.8 trillion annuity niche has evolved on the roots of commission-based services offered through brokers and insurance agents. Often there was no regard for the clients’ future and their best interest. But with 2017 gone, there is good news for investors due to the new set of regulations that inflicts a fiduciary standard on any investments bought for a retirement account, changing the current annuity rate market.
The rules, ratified by the Department of Labor in June, will be implemented completely in 2018. However, the impact is already being felt. With the change in annuity rates, sales of annuities are 18% down this year. Firms that offer annuities are responding with their innovative techniques. Almost all of them will be beneficial for investors who are seeking for a lifelong pension income and tax benefits that annuities provide.
Pension income plans must be carefully devised. So it is critical to learning about all different kinds of annuities before making any buying decision. For instance, few annuities, such as variable annuities and indexed annuities, often become problematic and fail to meet the requirements of investors, as they come with various restrictive terms and capped charges. The smart decision for approaching retirees is to opt for fixed annuities, such as deferred or immediate. All you need to do is pay a lump sum amount to an insurance company based on the retirement annuity rates, and in return, you will get payments—now or later.
In case you do not feel satisfied with the features of a fixed immediate annuity, consider a deferred annuity or longevity insurance. Deferred annuity program does not start offering payments immediately; instead, the insurer begins the payment at a certain point of time in the future, especially when you turn a specific age. Taking the annuity rates of 2017 into account, opting for a deferred annuity can be a great option to secure your pension income in the future. Moreover, deferred annuities cost way lower than immediate fixed annuities. They let the insurance providing firm to invest your money in the market for a brief period before starting to pay you.
The guarantee of an annuity remains intact only till the financial services company, or the insurer stays solvent in the market. Hence, it is advisable to buy an annuity from highly-regarded companies. Also, market gurus suggest to often divide the buying amount between a few of them. For instance, if you want to spend around $400,000 on annuities, you might purchase an around $100,000 contractual agreement from four different top-rated insurers. This secures your money from an unlikely event, and only a part of your future pension income will be at risk. While considering the services of an insurer, check the credit agency rating and make your decision accordingly.
When purchasing an annuity, you will receive a lesser amount for your current payment when annuity rates are low. Since the country’s present annuity rates are going to break records in going down, it can be useful to delay the purchase until the rates go high. In case you cannot afford to wait, then considering the current interest rate scenario, you can use a laddering mechanism. This strategy includes the division of your overall planned annuity purchase into pieces and buying installments on time.
A new class of annuity appears on the chart this year for the first time. Known as indexed variable annuities or buffer annuities, they allow you to fix your returns to an index such as the Nasdaq 100, MSCI Emerging Markets, or Standard & Poor’s 500. These annuities are quite similar to fixed annuities but have the space open for greater highs and lows.
While indexed annuities are now mostly purchased along with riders for guaranteed whole life income, it is not the same case with buffer annuities. They put limits on losses, but apply a cap on the index’s gains as well. With a buffer annuity, even though you might be exposed to the downside of losses considering the annuity rates, the returns can go up to 8% or more.
Finally, you know that annuities allow you to invest a big amount of cash and save you from paying high taxes. Choose the ones that will give you the maximum benefits with lesser risks to enjoy your retirement life at your will.