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What are the best annuities to buy?

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Are annuities a good investment?

Annuities come in many shapes and sizes, with seemingly countless option and feature combinations.
But which ones are the best annuities?  As with any financial decision, your answer will depend on several factors as no single annuity is right for everyone.

I certainly don’t expect to make you an annuity expert in the next few minutes, but I do hope I can help simplify what is often a seemingly overly complicated investment product. 

Let’s start with what annuities are not.  They are not investments if you are looking for high returns on your money.   Annuities are rarely able to offer the higher interest rates available through mutual funds and it may help to not even think of an annuity as an investment but more of a guarantee.  A guarantee that when you retire you will still have money going into your bank account each and every month, for life.
Kiinda boring but also kinda comforting. 

You will definitely hear promises of this bonus or that, and without question you can earn a decent return with certain annuities over time, but if aggressive growth of your principal is what you are looking for, look elsewhere. Think of this as insuring your money for your retirement.  A guaranteed income stream for life.

You will need to determine when you will need the payouts to start, how much you will need and for how long. With these factors you can use an annuity calculator to determine how much you will need to start.

Remember, the thing to keep in mind is that you are investing for your future after retirement.  If you are going to need access to this money in the near future…look elsewhere!  The penalties for early withdrawal can be severe.

A VERY brief overview of different annuity types:

Immediate annuities.  You deposit an amount with the insurer, and the insurer immediately begins making regular payments. You may choose to receive your payments monthly, quarterly, or annually. You can receive payments for the rest of your life, the joint life of you and a beneficiary (such as your spouse), a set period of years, or the longer of your life and a period of years.

Index annuities.  These are deferred annuities. The returns compound tax deferred until distributions begin. The returns of these annuities are tied to the performance of one or more stock market indexes using a formula. Usually there is an annual floor or guaranteed return of 1% to 3%. They also have an annual cap or maximum.  These products usually guarantee the account against losses. Sometimes 100% of the principal is guaranteed, sometimes only 90% or so is guaranteed.

Variable annuities. These are mutual funds combined with annuities. The investor selects investments from those offered by the insurer, and the returns from the investments compound tax deferred in the account, after subtracting fees and expenses. Most variable annuities are deferred. But some immediate annuities are variable; the annual payouts vary with the returns of investments selected by the insured. Many of the VAs now have guaranteed death benefit guarantees and lifetime withdrawal benefits.

Each option has a slightly different feature customized to a different goal or financial situation.

If you are looking to compliment a portfolio and are already over the age of 59 ½, the reliable, immediate income of an immediate annuity may be an option to take a closer look at.

Planning for your retirement and concerned about market volatility?  Index annuities may offer more modest growth than a mutual fund, but by guaranteeing up to 100% of your principal, you can rest easy knowing that you will have a guaranteed income stream during retirement, even if there is a significant downturn on the market.

If you are looking for an opportunity to receive higher returns on your principal, Variable Annuities allow you to invest your money within a range of "subaccounts” which are really mutual fund type investment options offered by the insurance company with varying degrees of risk and reward. Whereas with a fixed annuity your payments remain the same, the returns from a variable annuity fluctuates along with the market. As the market rises, so does income, as the market declines, so will your income.

Beyond these basic features, you can often customize your annuity with features such as guaranteed income or death benefits.  These added features are called Riders.  Annuity riders usually come with an annual cost, generally ranging from.1% to 1.0% of the annuity's value but allow you to customize your annuity to your set of life circumstances.

I have been talking a lot about guarantees.  A guarantee is only as good as the company making it and that goes doubly so for a company you are relying on for your future wellbeing.  So how do you know that the company you are handing over your life savings to is still going to be there in ten years? 

Four independent agencies—A.M. Best, Fitch, Moody’s and Standard & Poor’s—rate the financial strength of insurance companies. Each has its own rating scale, its own rating standards, its own population of rated companies, and its own distribution of companies across its scale. Each agency uses numbers or plusses and minuses to indicate minor variations in rating from another rating class.
For example A.M. Best’s four top ratings are:

A++, Superior

A+, Superior

A, Excellent

A-, Excellent

You should very seriously consider a company’s rating from two or more agencies before judging whether to invest in an annuity from that company. The financial strength of the insurance company that you are working with should be in line with your personal risk factor. A slightly lower ranking does not necessarily mean that a company is a candidate for default, only that it is a greater possibility.

So in the end, the question is not what is the best annuity, the question really is what is the best annuity option, if any, for my financial plan, after I  carefully consider my current financial situation, my long term goals and my risk tolerance. Also, does the insurance company backing my annuity have a rating that suggests they will be around when it’s time to collect?  Having the answers to these questions, in conjunction with the assistance of a professional financial advisor should help you more confidently navigate what can sometimes seem like a daunting undertaking.

As with any investing decision, when determining whether an annuity or any investment  is right for you, look at your entire financial situation, figuring out your goals and risk tolerance, either on your own or with the help of a professional financial Advisor and always keep your long-term goals in mind.

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