Some people automatically reject annuities—and often because they just don’t understand them. Even the best annuities aren’t for everyone, but if you are going to decide that an annuity is not right for your retirement plan, make sure you are doing so for the right reasons. It can help to have a thorough understanding of the main types of annuities that are available to investors.
To help you decide if an annuity is right for you, and if so, which type of annuity is right for you, consider these five types of annuities.
A variable annuity is essentially a group of mutual funds absorbed by an insurance company, repackaged and then sold to the investing public under the name variable annuity. Variable annuities are associated with high fees, so unless you like paying for the most expensive form of life insurance on the planet, they are probably not good for you.
How much are the fees? Typically, they are between 2 and 5 percent per year. That means, if you have $200,000 invested in a variable annuity, it means you are paying $10,000 a year in fees. At Ty J. Young Inc., we’re a fan of avoiding fees if you possibly can, which means we’re not a big fan of the variable annuity.
In a fixed annuity, there are no fees, and your principal is guaranteed to be safe from market loss as well. When you purchase a fixed annuity, you get a fixed rate for a set amount of time. For example, maybe you buy a three-year fixed annuity, with which you are guaranteed to never lose money and make 2.5 percent per year every year during that period of time—just like a CD.
With a fixed annuity, the insurance company makes money by using your money over time like a bank.
Flexible fixed annuity
The flexible fixed annuity has many of the same qualities as the fixed annuity including zero fees; however, your rate of return is only guaranteed for the first year. While you may get a guaranteed 2 to 3 percent rate of return throughout the first year, after that, if interest rates go down, your interest rate might go down. Conversely, if interest rates go up, your interest rate might go up. Therefore, you want a flexible fixed annuity if interest rates are going up, but not if interest rates are going down.
When you buy an immediate annuity, it’s like buying a pension. You take a lump sum, give it to an insurance company, and in exchange, it will pay you a set amount each month for the rest of your life. For example, say you give the insurance company $100,000. Then, you might set it up so the insurance company gives you $600 a month, every month for the rest of your life.
Some investors have said that they want to run out of money on the last day of their lives. If you truly want to do that, then an immediate annuity is ideal. In addition, immediate annuities have no fees, and the insurance company makes money by using your money over time.
These are the types of annuities that we recommend for most of our clients who are looking for protection of their principal, a reasonable rate of return and the opportunity to grow their money over time. When you put money into an index annuity, you get an insurance policy in your hand guaranteeing your money against losses. We insure our cars, our houses, and our lives, and with an index annuity, you can think of it as insuring your money as well.
With an index annuity, when the stock market goes up, your money goes up with it, and your gains lock in on an annual basis. When the stock market goes down, you don’t lose anything. You go forward with your money and never backward.
The best types of index annuity accounts have no fees, and that’s because you commit your money to a specific time frame. Again, the insurance company makes money by using your money over time.
The best index annuities accomplish growth and safety in a fee-efficient way. Good index annuities:
- Offer you a reasonable time commitment (between six and 16 years in the best accounts)
- Do not charge fees, guaranteed
- Average a 6 to 8 percent rate of return
- Come from insurance companies with high ratings
- Guarantee that you will never lose money unless you take your money out early
The differences in these types of annuities show how deciding what investment vehicle is right for you comes down to your individual wants and needs. If you need help determining whether or not an annuity can benefit you in retirement, call the Ty J. Young Inc. team today at 877-912-1919 to learn more.