In general, annuities are secure and can be an excellent complement to your retirement plan. Still, you must be cautious and ensure that you’re purchasing the correct products from reputable financial organizations. Let’s look at the risks and advantages of annuities one by one.
What are annuities?
An annuity is a contractual agreement between an individual and an insurance company. A person pays a certain premium upfront in exchange for later payments, usually after they retire. Annuities are popular among retirees because they provide a guaranteed income in retirement, effectively replacing the pension payments that many workers received in previous generations.
Types of Annuity
There are many different forms of annuities. However, they mainly fall into two categories:
- Fixed annuities: The most common sort of annuity is the fixed annuity. This annuity ensures that you will receive your entire investment back, plus a little interest. These aren’t very risky, but you won’t see your money grow as much as you might with an alternative investment.
- Variable annuities: There is no interest guarantee with variable annuities. Your principal is usually safe, but the interest you get is dependent on the performance of the investments you make. Variable annuities provide a more considerable return potential but carry a higher risk.
Are annuities a safe investment?
You may purchase an annuity with confidence if you buy it from a reputable insurance firm. However, it’s worth noting that annuities aren’t bank deposits and aren’t covered by the FDIC. This means that the safety net would not cover annuities in a systemic collapse. In some states, their guaranty funds for insurance company failures exist, which varies. Variable annuities are riskier than fixed annuities since their payout is significantly more reliant on market conditions. However, you will receive your principal back, so you will not technically lose any money. However, because of inflation, your money will be worthless when you receive it in retirement, putting you in danger of losing value.
How to Choose the Best Annuity
The key to feeling secure about your annuity purchase is choosing a reputable insurance firm. Examine the company’s credit ratings. In the United States, there are four credit rating agencies to consider: AM Best, Fitch, Moody’s, and Standard & Poor’s. You can generally trust a company if it has a high rating in all of these. If it doesn’t, you might want to look for something different. Aside from that, think about how much you can afford to spend on premiums and what kind of payments you would desire in retirement. A financial advisor can walk you through numerous options for your retirement needs and goals if you need help adding annuities to your portfolio.
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