Are Annuities a Good Investment?

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Planning for retirement can be a stressful process because you do not want to end up with not enough money in your retirement fund. Employees covered by benefit pension plans, have been steadily declining over the years. This impacts your retirement in a many ways. First, social security and pensions are the primary sources of guaranteed income throughout retirement. Therefore, the decline in private sector pension plans has many retirees relying on social security as their only guaranteed income throughout retirement. Second, this decrease in traditional pensions has been offset with contribution plans such as 401(k)s. The difference is that these defined contribution plans shift the investment responsibility from the employer to the employee. As a result, the extra responsibility brings the risk associated with picking your own investments and bearing the burden of your own retirement security. Some investors feel that investing in annuities can help reduce the stress.  Some annuities that have a small return or guaranteed withdrawals might help relieve the stress.

Annuities seem to be a simple investment option, but that is farther from the truth. Annuities are complicated and many agents do not completely understand them. This could lead to unexpected fees and potential loss of your money. Therefore, fail to provide you with a secure retirement. It is important to understand annuities and the different types of annuities. This knowledge can help you shield yourself from losses and picking the right type of annuity for your situation.

When choosing the right annuity you should ask yourself a few questions: What type of annuity do I want? What are the annuity fees and expenses? Will I be charged a fee if I withdraw assets from my annuity early? First you should research the types of annuities to determine the right annuity for you. There are three primary types of annuities, fixed, variable and indexed annuities. Each annuity has their own benefits and risks, therefore being aware of these elements can help you choose the right annuity for your retirement. Fixed annuities normally guarantee a fixed or minimum rate of return over a set time period (term). This type of annuity is similar to a bank Certificate of Deposit (CD).Fixed annuities usually do not suffer losses due to their guarantees, however, other types of investments might provide similar returns. Variable annuities are investments that allow you to invest the premium in sub-accounts, similar to a mutual fund. They might offer a guaranteed minimum return of principal even if the underlying assets underperform. However, fees and other costs can reduce your total return.  Indexed annuities use the stock market in particular the S&P 500 as a benchmark for the rate of return. There is usually a cap on the portion of the market’s return you will receive. Also, some indexed annuities are based on benchmarks that do not include dividends, which can lower your total return. The next question to address is the fees and expenses. Most annuities have multiple layers of fees. Over time, these fees add up to be thousands of dollars and can reduce your total return. Therefore, it can be difficult to reach your retirement goals. You should also be aware if there is a fee to withdraw your assets early from the annuity. The fee that would be applied is called a surrender fee. Normally the surrender fee declines over the years.  Most annuities allow your to withdrawal a small amount per year but you will be penalized if you withdrawal all of the annuity. Therefore, it is important to choose the right annuity for your goals from the start.

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