Annuities, a Needed Investment

Are you concerned with not having enough money for retirement? Most of us are. We are living longer and healthier lives, our 401k and pensions could not be enough to survive. An income annuity could give you guaranteed extra income, monthy or yearly. This could reduce the risk of running out of money due to living to long.

What is an annuity? An annuity is a sum of money given to a person at regular intervals. It can also be an investment. You pay a lump sum of money to an insurance company or bank and buy the annuity. When you retire the financial institution pays you regular income for the rest of your life.

Annuities have two phases: Accumulation phase abd annuitization phase. During the accumulation phase, you give your money and it earns a rate of return. During the annuitization phase, you recieve regular payments from that contract, until your death.

There are two ways to purchase an annuity: A one lump sum payment or ongoing contributions. Usually you should'nt invest more than 30% of your retirement savings to an annuity.

Annuities are tax friendly, if you follow their guildlines. You can rollover your IRA or 401k, to an annuity, and it's a tax free transfer. You can also transfer from one annuity to another tax free, this is called a 1035 exchange. If you're, at least, 59 1/2 years old and use your Roth IRA assests, the IRA has met the five year period for tax free distributions, the transfer is tax free. With your Roth IRA assets purchasing the annuity, even the payments to you are tax free. You will have life long income that is tax free. If you purchase an annuity with a mutual fund or individual securities, a portion of each annuity payment is tax free. You've already paid taxes on your original investment.

Annuities have death benifits also. If you die before recieving any payments, your beneficiary will get the current value of the annuity or the money you put into it, whichever is more. If you start recieving payments and die, the insurance company keeps your money. If this concerns you, purchase a "term certain" annuity. This annuity guarantees you or your beneficiary will get payments for a certain period of time. Ex. 10 years, even if you die, your beneficiary will get payments for ten years.

There are three different types of annuities:
Fixed Annuity - The money you invest has a fixed rate of interest that is guaranteed by the insurance company. This is a no risk annuity. If the stock market does well, you will recieve a fixed rate.
Variable Annuity - The money you invest is placed in subaccounts. The subaccounts are in aggressive growth funds, stocks, and bonds. This is a risky annuity. If the stock market does well, so will you but if it doesn't, neither will you.
Equity-Indexed Annuity - The money you invest in is in a fixed account although you can still earn interest based on the performance of a stock index. Ex. of stock indexes: S&P 500, Dow Jones, Russell 2000, and NASDAQ Composite Index. You can earn interest and have a fixed account. When you recieve payments, they are fixed.

The average annuity buyer is 55 years and older. Young people don't usually invest in annuities. There's a 10% penalty tax if you withdraw money from the annuity before 59 1/2 years.

Before buying an annuity:
1. Shop around, find the best insurance company for you. Annuities are long term, make sure the company is solid.
2. When judging performance of a specific company, do your homework. Don't look at last month's top performers, look at the last 3-5 years. Check the annuities history from The Barron's, The Wall Street Journal, Morningstar, and Lipper Analytical Services.
3. You'll want to know your insurance company's rating. You can contact your states Department of Insurance, A.M. Best, Standard and poor's, and Moodys rate the stability of insurance companies. You can also go to the library for information on the insurance company of your choice.

Retiring should be a pleasant experience in everyone's life. An income aqnnuity in a retirement income plan will give you a higher cash flow throughout retirement. This extra security will increase your cofidence to spend money and live without financial worries.