If you are looking at purchasing an annuity, there are some things to consider first before even looking into the many kinds of annuities out there. For example, annuities typically are not for young people unless they plan for something like an early retirement, or have come into a large inheritance. They should instead focus on investing into their 401(k)s or a Roth IRA, both of which allow for the most growth and flexibility for your investments.
Before purchasing an annuity it is best to learn about all of your options and carefully consider which one would be best for you and your family. Annuities can be great for retirees and there are some options that are highly recommended by many financial advisors, while there are others that seem to be completely advised against. So, careful homework and sitting down with your own financial advisor before purchasing is a must to understand which one is right.
Although there are several different kinds of annuities, the three main ones are fixed, variable, and indexed.
Fixed annuities are popular with retirees. The return may not be as high as with other annuities, but it is safe and therefore is recommended regularly for retirement. To protect your investment even further, you may consider purchasing a Cost of Living Adjustment or COLA to protect your investments from inflation.
With a variable annuity, you are investing in a more volatile market of stocks and mutual funds. These annuities are more popular with middle-aged investors who are still working and looking to build up their investment over the long term. You run the risk of your investment going down with the market, or even negative. But on the other hand, a good investment can be earned when the markets are up and give you a good head start to retirement planning.
An index annuity gives you a little of both fixed and variable annuities. You will have a minimum you are sure to get back, while at the same time you are able to play the stock market.
You can also look at whether you want to make your annuity a lifetime annuity or a term annuity. With lifetime annuities, it will continue to pay regularly the rest of your life. You can also buy protection for these so that if you pass away before you make your entire investment back, it can go to your loved ones so you do not lose any investment. With a term annuity, it is for a shortened but known period of time that you are paid a steady income (such as 5 or 10 years). For retirees, it is usually suggested to go with a lifetime annuity so you have an income you can count on for the rest of your life and be sure you can take care of your needs.
These are just the basics of annuities. If you think that an annuity is right for you at this time in your life, speak with your financial advisor so they can help you decide which one would best fit you and your loved ones so you have the peace of mind you need in retirement.