Are Annuities worth the Investment?

Annuities offer security against market volatility, tax benefits, and a guaranteed income source. 

FREMONT, CA: Besides the usual retirement income sources like Social Security, 401(k) and pensions, annuities can also provide a steady monthly income stream for many retirees who rely on them. They can also allow them to choose the proper time to start taking distributions. An insurance company contract is called an "annuity." An annuity can be bought with a lump sum or a series of payments. The insurance provider then gives the policyholder consistent cash flow when they're ready for a predetermined amount of time. Consumers commonly buy annuities to reduce the chance that they may outlive their retirement assets.

There are a few key things one should be aware of if they're thinking about buying an annuity.

There are diverse annuity types: Annuities come in a variety of forms, and it's important to take into account the distinct qualities and advantages of each. There are three typical kinds:

Fixed annuities: For a predetermined time period, usually three to seven years, consumers will get a fixed interest rate established by the insurance company.

Variable annuities: The annuity plan invests the policyholder's money in a mutual fund portfolio. The annuity may lose value, and returns are not assured. The state of the market affects performance. Gains or losses that are higher than those of a fixed or indexed annuity are possible.

Indexed annuities: One will get interest based on the success of a designated market index, like the S&P 500, rather than a set rate. With an index annuity, the insurance company's minimum return is 0 percent, so one won't experience any loss even if the S&P 500 has a negative year. The insurance provider typically sets caps on the "upside" as well. Thus, if the S&P 500 is up 8 percent and one's cap is 5 percent, they will only see a 5 percent return.

Money increases tax-deferred: Interest accrues in the annuity tax-deferred while the consumer funds are in it. This implies that until individuals take money out of the annuity, they won't have to pay taxes on any interest they receive. As a result, they will be paid interest on the money they have, the money they would have paid in taxes, and the interest on their interest. The tax treatment of annuity distributions varies based on the method used to finance the account. One can use pre-tax or post-tax funds to fund an annuity. Either qualified or non-qualified annuities are the terms used to describe these. 

Pre-tax contributions used to support qualified annuities are typically taken out of an IRA or 401(k). Payments from qualifying annuities are subject to taxation.