Supplementing your Social Security and pension income is possible by investing your savings in fixed annuities or variable annuities and then you annuitizing for lifetime income. Depending on your additional income needs, you could also choose to invest only a part of your savings amount. Indeed, insurance products like the annuity can offer an income for life. However, there are different types of annuities and there's also the question of risk. Fixed annuities are a great investment for those who are most conservative is variable annuities offer the opportunity for greater gain.
Let's suppose that you've decided that the basic features of annuities serve your needs: the tax-deferred growth, the ability to get an income you cannot outlive, the favorable tax treatment of those lifetime annuity payments and the various guarantees available.
Once you decide to secure your golden years with annuities, how do you decide which type of annuity to choose fixed annuities or variable annuities? When you opt for fixed annuities you get an income-for-life should you choose. Insurance company contracts bank on long-term interest obligations from bond investments to ensure that you continue to get the income. Obviously, the benefit of this type of annuity is that you're assured of a steady stream of additional income. However, do remember, that over a period of 20 years, even minor inflation can bring down the value of the payouts you receive.
In contrast, payouts from variable annuities, are sensitive to market ups and downs. While these can also give you an additional income for life, the payout can vary over your lifetime, depending on market conditions. The primary reason being that these types of annuity products are funded by stocks, mutual funds and similar products linked to the market. Variable annuities can compensate for inflation – but, only when an economy is on the rise. A recession can also lead to a significant reduction in the amount you receive. However, variable annuity companies have offered riders to mitigate this problem such as the guaranteed minimum income benefit rider.
Fixed annuities can offer increased safety for the retiree who is dependant on his savings. However, he may decide to risk the problems caused by inflation. i.e. the decreased purchasing power of is money. Retirees who wish to invest relatively aggressively can choose to opt for variable annuities. Excepting the possibility that one's retirement years could be shorter than the average rate, splitting the savings, a part into fixed annuities and the rest invested in variable annuities could be a good solution.
Note that annuities once annuitized cannot be surrendered for value. Income from deferred annuities is taxed as ordinary income and withdrawals prior to age 59 ½ are subject to a 10% penalty. Income from annuitization is taxed part as ordinary income and part as return of capital. Any guarantees are based on the claims paying ability of the insurance company. Annuities should be considered long term investments. Annuities are insurance products and subject to insurance related fees and expenses.
If you are considering an investment in any type of variable annuity please carefully consider investment objectives, risks, charges, and expenses of the Variable Annuity and its underlying sub-accounts before investing. For this and other information about any Variable Annuity investment, always obtain a prospectus and read it carefully before you invest.
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