An annuity is a great way to protect and insure future income, but it’s one not many people are familiar with. Annuities are incredibly versatile, and you can set one up to handle retirement income, to pass on wealth, to fund education, or as part of a trust.
The biggest misconception we often hear about annuities is people thinking they don’t have enough money to have one. But you might not need as much as you think for an annuity. Like any other insurance product that serves as an investment, it’s important to talk with a knowledgeable advisor to determine what’s best for you.
It’s fairly common to see structured settlements set up as annuities as well. If you win a settlement of some kind, especially one for a child, some forward-thinking judges will allow parents to create an annuity with those funds. The more traditional route of a federally backed savings account might get about one percent interest, but an annuity could draw closer to six or seven percent interest. That’s a big difference! And, you can set up an annuity where the child can’t access it until they’re 18 or even 21.
Personally, we don’t recommend variable annuities, because you can lose principle on those. Indexed annuities carry a lot of the same features but are a bit more stable. Basically, you set up the annuity and designate a time period before you can make adjustments to it. Let’s say you start with $60,000 in the annuity and gain $5,000 in value the first year. You can then lock the annuity at $65,000 as your new floor.
Annuities are a tax-deferred investment. It’s an insurance contract similar to life insurance or any other contract. You have a guarantee from the insurance company that the funds will be there when the disbursement period arrives. You’re protecting your investments and assets and getting great tax benefits for it. In some cases, you can even roll a 401k from a former employer into an annuity, which might mean you access the funds earlier.
Some annuities are a one-time investment that you can’t add to later, while others may allow you to make an annual contribution to increase the total value of the annuity. For those sort of annuities, you can set one up with very little money and pay into it over the years if you prefer.
Like any other investment tool, you want to be sure you’re monitoring their growth and using the funds strategically. That’s where it’s best to work with a qualified professional to advise you on the type of annuity you need and your best strategy for how you draw those funds. And that strategy might change over the years as you get closer to retirement or your financial picture changes.
Many people today will outlive their basic retirement savings, and few people are able to live on social security benefits alone. With an annuity, you can create a lifetime income. You don’t want to put everything you have into annuities, but it’s an important piece of the overall strategy to have an income you can’t outlive.
Some annuities also have exceptions to their early withdrawal penalties that allow you to draw a certain percentage each year if diagnosed with a chronic illness. That can be a helpful resource when medical bills are stacking up.
There are lots of advantages to annuities, but it is important to make sure you pick the right kind for your specific situation. We can help advise you on the best products for your needs.