Saving up money seems like a nuisance, but it needs to be done properly. If you do not manage your money right and plan for retirement correctly, it may not end well. From not being able to spend your retirement days the way you want to being drowned in debt. Not only that, when you pass away, you can leave a big financial scar on your family.
So, what move should you make? There are a lot of options. Classic pension plans seem to be the regular option. There are also 401 (k) plans and certificates of deposits. What about loans? Choosing the right plan can prove to be quite challenging. Here we will discuss one of the safest answers for this question, and that is an annuity.
What Is an Annuity?
Annuities are insurance contracts. These contracts provide constant revenue for a specified period of time or even a lifetime. When asking the question ‘’is buying an annuity right for you?’’, besides knowing that this is the safest way of saving money, you should first look through the variety of options. Nevertheless, the annuity will ensure that your money is safe from dispersion.
A fixed annuity guarantees an interest rate that will always be positive. No matter the market state this annuity will always give you the money back at the specific interest rate that you signed up for.
The reason why a fixed annuity is so stable is that the company invests only in high-stable corporate and government bonds. To guarantee a minimum return rate, these contracts usually have a minimum rate guarantee. Be sure to check that out when signing the contract.
Fixed Index Annuity
A fixed index annuity pays an interest rate based on how a specific market is performing. These annuities offer a higher return rate than fixed annuities, with protection in case the market declines. You choose a certain participation fee (from 25% to 100%) and gain a certain yield of how much the certain stock’s index gained.
A variable annuity is a contract based on how the sub-accounts are performing. Sub-accounts are, in a simple way, accounts within an account. These annuities can be bought with a lump sum or with a series of payments. Variable annuities are a bit risky. That is because the investment may go up but it can also go down.
One of the advantages of variable annuities is that they grow tax-deferred. That means that you do not need to pay taxes on investment gains until a certain period. You can control the income as you wish. Besides that, in the case of death during the payout phase, there is a chance that your beneficiaries receive a guaranteed death benefit.
Annuity and Other Investment Plans
There are many other investment plans. Which one of these investment plans you choose depends largely on your circumstances. Here we will compare some of the most common plans.
Annuity vs. Life Insurance
There are some similarities and differences between an annuity and life insurance. Both options are tax-deferred. An annuity can be provided back as a lump sum or, more frequently, as a series of payments. Unlike an annuity, life insurance is provided back only as a lump sum. Besides that, life insurance is only paid out when the individual dies.
One of the drawbacks of life insurance is the higher fees. These fees are usually vague and not easy to understand. You can hire a lawyer to better understand the contract, which will cost you additionally. That is why most of these contracts lapse.
Annuities are a much safer option. They are more transparent and easy to handle. Not only that, you can invest in annuity whenever you want and you and your loved ones will better reap the benefits.
Annuity vs. IRAs
An IRA (Investment Retirement Account) is a savings account with tax benefits. Comparing it with an annuity, you have more control over what you are investing. That can have certain advantages and disadvantages. For example, if you do not know how to invest, you can expect some losses. With an annuity, everything is safely conducted by someone else.
IRAs can not be shared with spouses. Your spouse will need to open a new account. IRAs are also regulated by IRS rules. Not only that, you can only make withdrawals once you retire. Annuities can be jointly owned. Annuity payments can also begin as soon as the investment is made.
Annuity vs. 401(k)
A 401(k) plan is a tax-advantaged retirement account. This account is offered by many companies to their employees. A 401(k) plan is also tax-deferred. This is useful if you do not have large sums of cash to invest at the start. Both 401(k) and annuity are easily passed directly to the named beneficiary.
Although you do not pay fees for a 401(k) plan, you can still be charged with expense ratios. These expense ratios are invested into mutual funds and index funds in your account. Compared to an annuity, 401(k) plans have no option for lifetime guarantee funds. There are not many investment choices with the 401(k) plans. These plans are also not capped like an annuity. That comes with both a possibility of more gains and also more losses.
Bottom line is, there is no simple answer. Retirement should be a pretty straightforward step in life. Unfortunately, it is not straightforward. You need to plan it if you want to spend your retirement time the way you like it. But, fret not. You can still make the right decisions. By knowing all the options and knowing your circumstances it will be alright.
Annuities are regarded as the safest way of saving money. These insurance contracts are easy to read. Everything is clear where you are going. If you choose a fixed annuity, you will know the exact rate at which you will gain money. If you want to gain a bit more, you can choose the variable annuity. But with a risk, unless you take the fixed index annuity. Compared to other plans (life insurance, IRAs, and 401(k)) there are many similarities and differences. Consult with your loved ones which one suits your desires the most and start at the right time.