subject: When Fixed Annuities Are Not The Answer [print this page] When Fixed Annuities Are Not The Answer When Fixed Annuities Are Not The Answer
Planning for your retirement can be an overwhelming task especially in our current economic climate. Whether you're new to investments or rethinking your current investment strategy many people are looking for ways to reduce their risk while planning for the future. Investments, like annuities, that provide guaranteed income seem like an obvious choice. However, what happens if your situation changes and you need access to your cash?
A fixed annuity is a financial product that provides a series of payments over a specific period of time such as a lifetime. Delivered on a set schedule, these payments can be paid monthly, quarterly, biannually, or annually. These annuities typically offer tax-deferred growth of earnings and may include a death benefit that will pay your beneficiary a guaranteed minimum amount. Annuities tend to be good for people who are worried about losses to their nest egg and can't handle the risk associated with other investments like stocks.
What is the upside to a fixed annuity?
Well the most obvious answer is receiving the regular streams of income. The growth of the money is tax-deferred so you will typically pay taxes on the income at a lower tax rate provided that your retirement income is less then you current income. Typically, unless the company goes out of business, there is little risk to your nest egg. So if you have a low tolerance for risk, fixed annuities are appealing. Since you know the minimum amount you will receive it makes budgeting easier.
What is the downside of a fixed annuity?
Annuities do not typically have cost of living adjustments therefore the purchasing power of your money declines as inflation increases. Which means your income stays the same but everyday purchases like bread, milk and eggs will increase in price. So in essence since it takes more money to buy things it is almost like your income is decreasing over time. Since the guaranteed amount of a fixed annuity is based upon the well-being of the insurance company the SEC suggest that investors should only purchase fixed annuities from top rated insurance companies from the top 5 rating companies like A.M. Best. Annuities are not FDIC insured but states do offer some protection. However there are restrictions therefore owning an annuity is not without some risk. Some of the fees that insurance companies charge for annuities can be costly.
In addition, if your situation changes and you need access to your cash you could be subjected to surrender fees.
Tips for Buyers
Diversify your retirement money. Use an annuity as only one part of your retirement savings. Remember the old saying; don't put all your eggs in one basket. This holds true for your investment nest egg. Look for insurance companies that are not in financial trouble with an A.M. Best's A++ rating. Find out what all the costs associated with the annuity including fees. Find out what these are paying for and if any of these fees optional? Discuss ways to lower your costs along with how these cost reductions affect your investment. Find out what are the surrender fees as well as the surrender periods. In addition, read everything to make sure that the fees can't be increased in the future. Discuss how and when you can withdraw money, as well as how it will affect your payments. Beware of teaser rates that go down after a year or two.
Have a Fixed Annuity and Need Cash?
There are still options if you need access to your cash. You can sell some or all of your future payments to Rescue Capital for a cash lump sum. This would allow you to avoid surrender fees while giving you immediate access to your money. You could use the money to pay down debt, reinvest it in financial products with higher returns or whatever you wish. The choice is yours. Of course, there is a discount rate associated with getting your money now instead of in the future. Rates vary by factoring companies so it pays to shop around.
