by Annuities Explained on July 15, 2010
Ahh, the infamous question of what kind of fixed income investment is the best. We’ll try to answer this question, laying out the pros and cons, and how you should evaluate what is best for your situation.
It is obvious from the comparison that you’re looking for a solid, predictable, fixed income investment, likely for retirement income. You’ll find that both annuities and CDs are very different, but for practical purposes are very much the same.
Annuities, especially prepaid and insured annuities (those that pay until the day you die) allow for greater predictability. Since you know you’ll be receiving a fixed payout for the rest of your life, you won’t have to worry about running out of money as you would with CDs. Also, annuities allow you to draw down on your principal without any concern. You can’t say that for certificates of deposit.
One last benefit of fixed annuities is that you won’t have to deal with the fluctuations in interest rates. CDs that yielded as much as 5-6% during the early 1990’s are now yielding less than half a percentage point in 2010. So, ask yourself, is that the kind of volatility you want in your retirement income? What if you had retired at the age of 65 in 1990, making more than 10 times the income then as you do at 85? Prices have surely risen since 1990, especially in health care, food, and energy prices, all of which you’ll consume the same, if not more at 85 than you would at 65.
Oh, and we didn’t even touch taxes! Growth in the accumulation phase of an annuity is tax free. You only pay as you make withdrawals.
CDs have benefits too
CDs certainly have their own benefits over annuities. First, certificates of deposit allow you to keep your principle investment while collecting interest monthly, quarterly or annually. Another benefit, if you have enough cash to make it through, is that upon your death you’ll be able to pass the principle investment onto children, grandchildren, who can set it aside for funeral and burial costs or even to start a college fund for the youngsters. It’s hard to put a price on generational wealth.
One major benefit is that should live less than your life expectancy, you’ll still have cash leftover. With annuities, the payouts cease at the time of death, and you’ll have lost everything unless you have insured your plan, or it allows for a cashout at death. Annuities that have the cashout option are generally more expensive, so you’ll have to price that in to your planning.
Get the best of both worlds!
We’d recommend that if possible, consider investing in both annuities and certificates of deposit. This way you’ll be able to get consistent cash payments from your annuity, as well as generate passive income from your CD investments.
Diversifying your wealth into both investments is a smart decision. You’ll have the safety of annuities as well as the opportunity to take advantage of high interest rates with CDs during the good years. Even into retirement, diversification is still very important, and you wouldn’t be wrong to invest in both.
by Annuities Explained on January 20, 2010
With the market reaching lows we haven’t seen since the great depression and with retirement investments going in the tank faster than people could pull their money out of them many investors are wondering what the risks of investing in annuities are, and with good reason. Annuities are one of the more confusing investment options so understanding annuity risks is important before sinking your money in. Don’t worry, Annuities Explained is here to help.
Fixed annuities as a rule are relatively “risk free”, or at least more risk free than stocks or mutual funds since the rate of return on most fixed annuities is guaranteed by the issuer. The problem lies within the issuing company itself and its ability to make annuity payments as guaranteed.
Over the last few years insurance companies like AIG and banks like Wachovia and Washington Mutual really fell on hard times and if not for a government bail-out would have collapsed. When you put all of your retirement investments in a single company like this then you run the risk of not being able to recoup your investment should the company go under completely.
Unlike certificates of deposit, which are protected by FDIC up to $100,000, annuities are not protected by the FDIC and therefore present more risk. Annuities do have some protection however in that the companies are required to pay off annuity holders before paying off debtors, so if the company is liquidated you stand a chance of getting some or all of your investment back.
As a result of this risk it’s important to consider the financial strength of the company that you are investing with and gauging what kind of future this company will have, especially if you are far away from retirement.
In comparison to certificates of deposits, annuities have a much higher rate of return, but as mentioned earlier CDs have the benefit of FDIC protection which for the typical investor should cover their entire investment. When deciding whether or not to buy an annuity this is an option that should definitely be considered. Even if the bank goes under, you will still be guaranteed your money unlike what would happen if an annuity provider went under.
Another annuities risk that you have to account for is the risk of locking in to a rate of return that is lower than you could get with a similar investment option elsewhere. Since annuities have a guaranteed rate of return, they don’t return a high yield like stocks or mutual funds would. If you need anything other than a low risk, low yield rate of return then you would probably be wiser to look elsewhere, otherwise you are risking the loss of potential income and you can find some relatively low risk mutual funds or bonds to invest in.
Bottom line, annuities are a relatively low risk option but they aren’t 100% risk free. Anything short of a government backed investment option will always have some risk associated with it and annuities are no different. Before investing in any annuities, whether fixed annuities or variable annuities, be sure you understand all of the pros and cons of annuities and you will be better off in the long run.
© Annuities Risk
