Are annuities a good investment?
Every day we are faced with a wide variety of investment options. You may hear about a hot stock on the Dow Jones industrial average; you might be contemplating investing in bonds, both government or corporate; or saw a commercial to buy gold or silver; or you have a relative that wants to open a business. All of these things are potential investments. The question is not if all of them are good investments, but if any of these investments are good for you.
Every day across the globe investors are investing in investments. An investment that is good for one person will not be good for another. To understand whether an investment is good for you depends on a wide variety of factors. Considerations like your age, size of your portfolio, current income and risk tolerance need to be analyzed. There is no single investment product that will be a perfect match for everyone since every investment has its own benefits and deficiencies.
Annuities, in one form or another, have been around a couple thousand years. The earliest investment grade annuities in the United States date back over a century. Throughout the year’s annuities have become increasingly complex and offer a wide variety of personalization. Considering its long history and ability to match options according to investors needs then the obvious answer is: YES, annuities are a good investment for many people.
Are annuities a good investment option for seniors?
For senior citizens that are searching for a low risk guaranteed lifelong income, annuities become an attractive investment option. If you are looking for guaranteed payments regardless of what is going on in the market, then fixed annuities provide safety. Indexed annuities are also widely purchased by senior citizens because they can have some level of market participation but shield themselves from declines in the stock market. It should be noted that surrender charges from an annuity have the potential of taking a substantial amount of the capital if you no longer wish to hold the annuity. Many senior citizens are concerned about longevity and the ability to continually withdraw funds for an extended period of time. Due to this fact, many insurance companies now provide the option of riders to add security and to provide a guaranteed minimum return. These riders ensure that if the purchasers longevity does not extend to receive a minimum payout threshold then the insurance company will make up the difference.
Are annuities a good investment choice for middle-aged investors?
For middle-aged investors and recent retiree’s annuities become an especially attractive investment option. For investors looking to gain the most from investing in annuities, the timeframe of 10 to 25 years is ideal. This ensures that the annuity has ample time to appreciate and any surrender charges will expire before you need to withdraw the money. Also, IRS penalties for early withdrawal expire at the age of 59 1/2, so you’ll no longer be subject to early withdrawal fees and penalties by the IRS. For a deferred annuity, you can set the date that payments begin at or near expected retirement date. You can lock in a precise rate of return with a deferred fixed rate annuity, earn a substantial amount with a deferred variable annuity, as well as reap the long-term gains in the market with a deferred indexed annuity. This strategy provides the best opportunity for long-term appreciation of your annuity. If you are in this age group of middle-aged to retiring soon an annuity would make a great part of an overall portfolio.
Are annuities a good investment for young people?
For younger investors access to income becomes a top priority. From current expenses or emergencies, access to cash to shield yourself from life’s day-to-day activities becomes very important. When you purchase an annuity you are entering into a long-term contract. While you are protected in your long-term earnings and the risk factor is very low, it does come at the cost of not having liquidity of your assets. Regardless of if it is an immediate or deferred annuity any withdraws made prior to 59 1/2 years of age are subject to IRS penalties. The IRS penalty can equate to a 10% tax on your withdrawals. Also as a younger investor, you are more likely to require an early withdrawal of your funds should anything arise. An early withdrawal would activate a surrender charge which can be high depending on your annuity contract. Overall if you are looking for large growth and you have a high tolerance for risk then annuities are not going to be your first choice as an investment option.
In the end, there is no such thing as a perfect investment for everyone in every situation. Annuities should not be a first choice investment for younger investors but for more seasoned investors they become an important part of a balanced portfolio. Annuities offer a wide range of risk to return categories. They can be either immediate or deferred annuities. The annuity can be fixed, variable or indexed. When considering investing in annuities always speak to a licensed financial advisor and/or a tax professional.