There Are Benefits To Owning A Fixed Annuity
Over the years, the popularity of annuities has gone through many cycles. Annuities had a good reputation, and annuities have been held in a bad light. For example, just as mutual funds have fees that we should watch, annuities have been considered bad because of their higher fees.
While many “senior” seminars have touted annuities as a solution to almost every problem, they really are not a “one size fits all” kind of product. The challenge for potential annuity owners is to understand the product clearly enough to determine whether it makes sense for them personally.
What are annuities?
Annuities are insurance-based products. When an investor purchases an annuity, they are receiving a guarantee that the insurance company will provide them with a fixed income stream for a designated period of time. This time period can be either a pre-determined number of years or over the investor’s lifetime.
Supplements other income sources
As many have come to realize, Social Security does not provide enough for most retirees to comfortably live solely on its monthly benefit. Unfortunately, without drastic changes, things will only get worse.
In addition, pensions have become a thing of the past. Very few employers still offer them. Given the state of Social Security and the almost extinct pension plan, retirees have to depend more on their own savings to fund retirement. A fixed annuity can be a beneficial supplement to these other income sources.
Guarantees against market losses
After the devastation many accounts experienced during the market crash of 2008, many investors realize that they cannot afford to take such huge risks with their retirement nest eggs. So many pre-retirees and retirees alike watched their investment account balances get cut in half during the downturn. Some retirees had to go back to work, and pre-retirees have had to delay retirement for several years.
This market experience has led many investors to seek some type of guarantee for their investment. Some investors turn to annuities for this guarantee, but an investor should be careful to review the many different types of annuities available before making the purchase decision.
Variable annuities allow the owners to invest in a group of mutual funds that are available on the platform. This may not be the best option for a retiree, because the account balance will be impacted by the fluctuations in the market.
Fixed annuities are somewhat different from variable annuities. It is possible that some retired households can benefit from using a fixed annuity for part of the overall investment strategy.
A fixed annuity can help protect against losing the invested principal. In addition to not losing principal, the investor is able to earn a fixed interest rate on the principal amount. Although the interest earned may not be as high as the potential earnings available in the stock market, this annuity eliminates the downside risks of the market.
Since the annuity payment will remain consistent, a retiree is better able to budget for household expenses.
Annuities will not solve all retirees’ investment problems, but they can help alleviate some of the unnecessary strains caused by the market. Retirees may consider talking to an investment advisor about possibly incorporating annuities into the overall financial plan.
About the Author
Ozeme J. Bonnette is a financial coach, speaker, and author of Get What Belongs to You: A Christian Guide to Managing Your Finances. Her focus is on increasing financial literacy among adults and youth around the U.S. She earned 3 Bachelor’s degrees at Fresno State, and her MBA at UCLA’s Anderson School. Her blog is
http://www.povertynorriches.com
. Reach her at
ozeme@thechristianmoneycoach.com
.
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