Like any financial investment, choosing the best annuity is a matter of personal choice and preference. For seniors, choosing the best annuity may depend on what the individual plans to do with the money or what the purpose of the savings is. For example, many seniors just want an annuity as a way to tax defer some income and leave a benefit for loved ones after their passing. Others may need some ready cash and want to be able to draw payments from their annuity. Choosing the best annuity can take some careful consideration.
Fixed vs. Variable Rate Annuities
There are two interest rate options when choosing an annuity, the fixed rate or the variable rate. For those investors who need ready cash and want a guaranteed payment amount, then the fixed annuity might be the best choice. The fixed annuity is set at a particular interest rate and remains at that rate regardless of economic conditions or profitability of the company one has invested with. Variable rate annuities are less predictable in their payout, but also have the better chance of a higher return. As market conditions fluctuate, the profitability of the annuity can increase with a strong market economy. While there is some risk, variable rates are often considered the better choice for long term investing.
Deferred Annuity vs. Immediate Payout
With a deferred annuity, the senior will not be collecting on the money invested until a much later date if at all. Payments are made into the annuity, and upon retirement or death, the payouts can be made. This is a great way to invest money because the income is tax deferred. Only when money is withdrawn from the annuity is it taxed and this can be planned for on the part of the individual. When planning to leave the money as a death benefit, a rider can be attached to specify the payments and the beneficiary.
With an annuity that is to be used as a source of income as an immediate payout, the initial investment amount is made, and then the scheduled payments can begin. The benefit of an immediate payout annuity is that the payments continue for as long as you live. So, if initially you take your 401k retirement savings and put is as a $25,000 lump sum payment to an annuity, then you can schedule payouts to yourself starting immediately. Should you live to be 110, your payments continue, and may exceed your initial investment. It works much like an insurance company in that it is a “pool” of money from all investors. Perhaps someone else who invested only lived a few years into their payouts, that’s where they are able to continue to pay you well into old age.
Making a Choice
For seniors, it really is a matter of considering what the money is needed for. For a person on a fixed budget and in need of immediate and predictable monthly payment, an immediate annuity with a fixed rate might be best. For the financially secure senior, a deferred annuity with a variable rate could be the more lucrative choice to make.