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Are Guaranteed Annuities Right For You?

annuitiesexplained | Jun 15, 2010 |

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In these troubled times when the stock market is way up one day and way down the next, investors close to retirement are looking for a safe place to invest their money in a safe investment, but one that will provide some return. For many of these investors annuities are the answer.

A guaranteed income annuity is an investment agreement between the investor and an insurance company that provides regular payouts once the investor reaches a certain age. For example, let's say an investor agrees to a $100,000 annuity. He or she would pay in a set amount each month until the $100,000 is reached. The annuity provider will then make out regular payments to the investor at a set point in time, with a guaranteed rate of return on that investment.

There are many benefits to owning an annuity. As mentioned earlier, guaranteed annuities provide a relatively safe stream of income when the stock and bond markets just can't be relied on. While the rate of return isn't huge, many annuities pay out more than a CD rate or money market investment.

One of the bigger benefits to investing in annuities is the tax benefits. Much like 401K and IRA, annuities are tax deferred meaning you don't pay taxes on the money until you withdraw it. Many investments are taxed as they grow and this can significantly eat away at returns. With annuities you only pay once when you withdraw, and even then only the amount earned is taxed while the amount you already contributed is tax free in most states.

Another nice benefit is that annuities typically make payments for the remainder of your life with rates based on the lifespan of the average investor. Since you are receiving payments for the rest of your life you may end up being paid more than your original investment amount. Some annuities also have a death benefit where you can have your spouse or children paid if you pass away before your original investment amount is reached.

One of the heavily criticized drawbacks to annuities is the amount of fees that annuities sometimes charge. Reports from the National Association of Variable Annuities reports that total fees can be anywhere from 1-3% of your investment, which can significantly decrease your rate of return. Guaranteed annuities tend to have less fees than variable annuities but it depends on the company you are investing with.

Overall annuities may be a good investment for your portfolio and if you are looking for a safe way to invest consider annuities to help protect your retirement investment.