There are three factors that you need to consider when you are looking at investing in a deferred annuity. They are...
2. Portfolio Balance
3. Minimal Risk Tolerance.
Time - You need to be willing/able to let your money sit
Ultimately, the investments you make should all be based around a larger goal structure that you have for your retirement. You need to be very clear about the things that you are going to want later in life, so that you have a sound understanding of what it will take to transport you to that destination. The idea in balancing your portfolio is to protect your investments from inflation while giving yourself the opportunity to accumulate wealth.
At a very base level, a deferred annuity is a fantastic method of balancing your portfolio and giving it stability. It should be used as a way to lock your money in, get a better rate of return that a CD (and others), and eventually drive you through your retirement. As is stated above, annuities are most beneficial when you are able to set that money aside and allow it to grow (tax free) for at least 7-10 years.
Portfolio Balance – You want to be aggressive in some areas and very conservative in others
Because investors are not taxed on the interest they receive each year with an annuity, the IRS imposes a 10% tax anytime funds from an annuity are accessed before the annuitant reaches 59.5. Using an annuity to fund a child's college education would not be suitable if the funds were needed before reaching the age requirement. Be sure to plan your annuity such that you're over 60 when it comes time to collect.
A fixed annuity should be thought of as a 401(k), which too imposes penalties for early withdrawal. Think of it not as a penalty but an incentive — the government wants to encourage you to save for retirement.
Minimal Risk Tolerance – Great when you have hit your point that you’re done living on the edge
Low risk tolerance comes in all different forms and fashions and for a huge variety of reasons. The fact of the matter is, you need to understand that there are more risks than simple market risks. Inflation risks, interest risks, taxation risks, all should be weighing on your decision on where to put your money. Once you are at the point where taking risks in the market is not intriguing to you anymore, and you are more keen on the idea of avoiding the other listed risks, this is the time that an annuity is appropriate for you.
There are different types of fixed annuities that will appeal to the varying degrees of risk tolerance that exist. Fixed-Indexed Annuities (FIAs) are good for clients who was to get out of the volatile market but are looking for better returns that a CD or IRA. Fixed annuities are better for the most conservative clients that are simply looking for an annually locked in interest rate that they can count on.
There is not a “perfect time” for an annuity purchase. You just need to make sure that you always have a handle on your location in your savings plan, and constantly reassess if new investments are necessary. If you follow these three criteria, you should be able to figure out if an annuity purchase is logical for you.
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