Know Your Annuity Strategy before Purchasing

As you may be pondering if annuities are the right financial vehicle for you, take some time to learn what they can offer and how they would best suit your financial needs.

The goal for most individuals is to make sure they do not outlive their financial resources.

In the “old days”, retirees could depend on Social Security funds and pensions through employers to comfortably live in their later years.

Given the fact that the economy has been down in recent years, along with the fact that people are living longer these days, the challenge to stay financially ahead of the game has become more daunting.

All estimates point to the fact that the next generation of retirees, Baby Boomers, will live longer and face more time in retirement than any generation. That being said, where does the income come from to support oneself?

Annuities have become more popular in recent years, but understanding how they work and they can benefit you is critical if you want to ensure some or a lot of financial security.

According to a Gallup survey, demographic data indicates that more than three fifths of non-qualified annuity owners have total households incomes of less than $75,000 and two in five owners of non-qualified annuities have household incomes below $50,000 per year. The translation is that just about anyone can afford an annuity.

There are several tips that potential first-time annuity purchasers should go by when thinking about or making a purchase.

First, you and only you can decide how much money you are going to put away for retirement.

Statistics from the Bureau of Economic Analysis show that at the start of the decade, the average American household was only saving 1% of its disposable personal income. Approximately two-thirds of American workers have no retirement savings account with which to speak of. The message is simple, save now and save as much as you can.

If you’re looking to go the annuity route, be sure to do your homework and understand how it works.

Quite simply, an annuity is a contract between the individual (the annuitant) and the issuer, typically an insurer.

The annuitant gives the issuer money through either a lump sum or via regular payments. The interest that the money earns grows on a tax-deferred basis and then, at a certain date, the individual starts to receive payment(s) in either a lump sum or at normal intervals.

You should think about an annuity in the event you have received:

• A lump sum through a pension plan;
• An inheritance or;
• Money from the sale of a residence or business.

Be sure to comprehend the basic types of annuities before purchasing.

With an immediate annuity the owner is responsible for one lump-sum premium payment and starts to obtain cash right away. With an immediate annuity you determine how long you would like to receive payments. The options will typically range from 5-20 years and life and on your surviving spouse’s life.

Deferred annuities tend to be popular with individuals who continue saving for retirement. Payments are deferred until a later date, and the tax on the investment gain within the annuity is deferred until you start to receive payments.

Fixed annuities translate into a stream of fixed payments throughout the life of the annuity, as the insurer or issuing company is responsible for the investment risk. Keep in mind that fixed annuities give back a minimum guaranteed rate of return.

There are also variable annuities, which are long-term investment vehicles set up for retirement savings. These annuities also offer tax-deferred status, and investors have opportunities for greater potential growth than is typically available with a fixed-interest annuity. The monthly payment is not fixed, but rather decided by the results obtained by the annuity owner’s investment selections.

It is always important when shopping for annuities to work with an agent.

An agent offers great service to determine what is likely in your best interests from a financial standpoint after reviewing your information. Most notably, they can help you with understand which value are guarantees and which are projections or estimates.

Finally, be sure to know and understand your risk tolerance.

The risk tolerance is simply what percentage of your investment are you willing to risk in order to hopefully receive a greater return?

The answers will obviously vary from one person to the next, but be sure to know yours before you get out your checkbook.