When to Buy Annuity
The type of annuities in which you may choose to invest, and the manner in which you
receive your regular payments, are dictated by your projections of your financial needs.
Standard fixed and variable annuity products are usually deferred; that means that there is a
period of time, typically seven years, in which your money is invested before your payments
begin. Depending upon the product, your interest rate may be fixed, or variable (the latter is
indexed to stock, bond and mutual fund or money market investments), or an equity index
annuity that has fixed minimums but can experience higher earnings. Immediate annuities can
be fixed or variable annuities, but they are constructed so that your payments begin
immediately. Many people use their retirement savings to, in effect, create their own pension
plans, rather than withdraw directly from investments that might rise and fall with the
markets. You give an insurance company your money; they guarantee you a certain number of
payments for an established amount. One thing to watch for when constructing immediate
annuities is whether or not you can leave the funds to a beneficiary. Constructing an annuity
with no residual payments clause may give you larger payments, but should you die early, your
remaining money goes to the insurance company rather than to your heirs. Annuities can be set
up to outlive you, either by transferring the annuity to another person upon your death, or by
establishing a death benefit. When considering an annuity, you should also think about
depreciation of the dollar and the rise in the cost of living. Some annuities will establish a
cost of living rider that pays less in the early years and more in later years to compensate
for both depreciation and anticipated increases in cost of living. Some annuities, instead
of being the result of an investment, arise from a settlement, or from an award such as
winning the lottery. Depending upon your annuity, you may decide that you would prefer to have
the cash for annuity rather than the monthly payments. Even with annuities that specify that
they are irrevocable and cannot be cashed in, there are organizations that will buy your
annuity and pay you cash. Although the amount is unlikely to be equal to the full value of the
annuity account, the value in today's dollars, or the uses to which you can put the money
today - including other investments - may make it worth your while. Many Americans today
worry that they will outlive their money. The average 65-year-old has a life expectancy of
almost 83, and many people are torn between the desire to increase their money through
investments and the fear of losing it through bad investments or through the vagaries of the
stock market. Annuities may not be a high-yield investment but they can provide great peace of
mind. |