Could an Annuity be right for me?

Investing can be a daunting task, especially for those who prefer to play it safe. If you are someone who values stability and predictability in your financial planning, then annuities might be the right choice for you. This guide will help you understand what annuities are, how they work, and why they can be a great option for risk-averse investors.

Annuities are financial products that can provide a steady income stream, grow your assets, and are typically used for retirement. They can be a great way to ensure that you have a reliable source of income when you need it most. In this post, we will explore the different types of annuities, their benefits, and some considerations to keep in mind.

What Are Annuities?

An annuity is a contract between you and an insurance company. You pay a lump sum, and in return, the company agrees to make periodic payments to you in the future. These payments can start immediately or at a later date, depending on the type of annuity you choose. Newer annuities even offer the option to never take payments, letting your beneficiaries receive your investment and/or cashing out all your gains once the annuity matures.

Types of Annuities

There are several types of annuities, each with its own features and benefits. Here are the most common types:

MYGA Annuities

Multi-Year Guaranteed Annuities provide a guaranteed return on your investment. You know exactly how much you will earn, making them a safe choice for risk-averse investors. These are very much like a bank CD.

• Pros: Predictable income/return, low risk, and tax-deferred growth.

  
  

• Cons: Lower returns compared to other investment options.

  
  

Variable Annuities

Variable annuities allow you to invest in various investment options, such as stocks and bonds. Your returns can vary based on the performance of these investments. JTW Financial Services DOES NOT offer these nor recommend them.

• Pros: Potential for higher returns and flexibility in investment choices.

  
  

• Cons: Higher risk and fees, and returns are not guaranteed.

  
  

Indexed Annuities

Indexed annuities are linked to a specific market index, like the S&P 500. They offer a balance between fixed and variable annuities.

• Pros: Potential for higher returns than MYGA annuities, with protection against market losses.

  
  

• Cons: More complex and likely have caps on returns.

  
  

Benefits of Annuities

Annuities offer several benefits that can be particularly appealing to risk-averse investors:

Guaranteed Income

One of the biggest advantages of annuities is the guarantee of income. This can provide peace of mind, knowing that you will have a steady stream of income during retirement.

Tax Advantages

Annuities grow tax-deferred, meaning you do not pay taxes on the earnings until you withdraw the money. This can be a significant advantage for long-term growth.

Customizable Options

Annuities can be tailored to fit your needs. You can choose the payment frequency, the length of the payout period, and even add riders for additional benefits.

Considerations Before Investing

While annuities can be a great option for risk-averse investors, there are some important factors to consider:

Fees and Charges

Annuities often come with various fees, including surrender charges, management fees, and mortality and expense risk charges. It is essential to understand these costs before investing. JTW Financial Services will ALWAYS explain to you if there are any fees and what that goes toward.

Liquidity

Annuities are not as liquid as other investments. If you need to access your money quickly, you may face penalties or surrender charges. Most annuities allow for a 10% annual withdrawal without a penalty.

Inflation Risk

Fixed annuities may not keep up with inflation, which can erode your purchasing power over time. Consider this when planning for long-term income.

How to Choose the Right Annuity

Choosing the right annuity can be challenging. Here are some tips to help you make an informed decision:

Assess Your Financial Goals

Before investing in an annuity, consider your financial goals. Are you looking for guaranteed income, or are you willing to take on some risk for potentially higher returns?

Compare Different Products

Not all annuities are created equal. Take the time to compare different products, including their fees, features, and benefits.

Real-Life Example

Let’s consider a recent scenario we saw at JTW Financial Services to illustrate how annuities can work near retiree.

Sarah is a 60-year-old woman planning for retirement. She has saved $200,000 in her 401(k) and wants to ensure a steady income during her retirement years.

Sarah is not ready to retire just yet, so her annuity will grow at 10% compound interest until she is ready for her future income! At 66 she retires, her Income Account in the annuity is worth $355,000 and will generate over $1,475 per month for her LIFETIME!

The Importance of Understanding Annuities

Understanding annuities is crucial for anyone considering them as part of their investment strategy. They can provide a sense of security and stability, especially for those who prefer to avoid risk.

By knowing the different types of annuities, their benefits, and the considerations involved, you can make a more informed decision.

Final Thoughts

Investing in annuities can be a smart choice for risk-averse investors looking for stability and guaranteed income. By understanding the different types of annuities and their features, you can find the right product to meet your financial goals.

Remember to assess your financial situation, compare different options, and consult with a financial advisor if needed. With the right approach, annuities can be a valuable addition to your investment portfolio.