Alternative Investments to Bank CDs – Annuities

Investors today are always searching for investments that are just right for their individual financial plans and goals.  In today’s competitive investing environment there are many options open to the individual investor. 

Certificates of deposit from banks will maximize the return on your hard earned dollars by giving you competitive interest rates along with a wide range of maturities to fit your needs but are not the only investment option to employ.  Whether you’re saving for retirement or a new car, bank CDs can match your investment goals.  But, there are a host of other investment options to consider in conjunction with bank CDs. 

As life expectancies have increased, people of retirement age have been concerned about outliving their assets.  There are numerous options available for investing short term and long term investment goals.  To be sure retirees not only live a long, full life, but also adequately maintain their assets, one way they manage this risk is with annuities.

With investment returns gyrating wildly, investors are looking to maximize their investment portfolio and equally importantly preserve their assets.  There are several different investment options that can satisfy the need for capital preservation and offer high rates of return.  One such investment option is an annuity. 

Annuities are a financial product that are often included with pensions, 401(k) plans IRAs, Social Security and other financial assets as part of a diversified retirement planning strategy.

Understanding Annuities

Annuities have been around for decades and as an investment they tend to go in and out of fashion.  An annuity is a contract between the investor and an insurance company.  With an annuity, the investor makes a lump-sum payment or series of payments.  In return, the insurer agrees to make periodic payments to the investor beginning immediately or at some future, predetermined date.  Annuities typically offer tax-deferred growth of earnings and may include a death benefit that will pay your beneficiary a guaranteed minimum amount, such as your total purchase payments.

You will find that many personal finance experts either hate the product or grudgingly suggest that they may be an investment option for some people.  Some of this may be due to the fact that many investors enter an annuity contract without fully understanding how they work.  Any investment vehicle has risks and rewards and carries tax implications.  You have to do your homework.

What is an Annuity?

Annuities are a popular investment to provide a source of income in retirement.  They are designed to be long-horizon investments to meet retirement and other long-range goals.  This is money you should not need to touch before age 59 ½. 

An annuity is a contract that you purchase from an insurance company.  You put the money into an annuity either in one lump sum or in periodic payments and your money accumulates and earns interest on a tax-deferred basis.  This means that you do not have to pay the tax on earnings until you start to receive payments from the annuity in retirement when your tax bracket should be lower.  The insurance company agrees to pay you (and/or a beneficiary) guaranteed payments for a specific period or for your lifetime.  The payout is a steady stream of income every month – a portion is earnings and a portion is a tax-free return of the money you put in.

The Advantages of Annuities.

Although it is possible to outlive the assets you have in other retirement savings, you cannot outlive the income from a life income annuity.  For many this is peace of mind.  As retirement goes, here are the main advantages of including an annuity in the mix:

Tax-deferred growth
A guaranteed benefit at death
Guaranteed life income options
The investments within a variable annuity can be adjusted or rebalanced without tax implications.

Types of Annuities

There are many options when it comes to getting the annuity contract that best suits your needs.  There are basically two different types of annuities.  An immediate annuity is one that starts making payments to you as soon as you purchase the contract.  A deferred annuity in one that grows your assets over time and payments start at some point in the future.

These categories of annuities can be further divided into two types of annuities, fixed annuities and variable annuities.  In a fixed annuity, the insurance company guarantees that you will earn a minimum rate of interest during the time that your account is growing.  The insurance company making the annuity contract also guarantees that the periodic payments will be a guaranteed amount per dollar in your account.  These payments may last for a specific period, such as 20 years, or an indefinite period, such as your lifetime or the lifetime of the investor and / or the investor’s spouse.

Another choice to make is how you want your money invested.  A variable annuity lets you control how the money is invested.  It is typically invested in stock and bond funds and you bear the investment risk.  A fixed annuity will pay you a specified rate of return and specifies a minimum guaranteed interest rate but the insurance company controls the investment.

Looking at Annuities

You have more options when it comes to the payout.  This is where the insurance agent comes in.  Annuities are complex contacts and you need to work with someone that you trust.  He or she can explain all the options you have.  Before you buy, here is a list of factors for you to keep in mind.

What are the penalties for early withdrawal?  We cannot predict the future but if there is a chance that you may need this money, you need to understand the consequences.
Are there any circumstances that permit you to cash in the annuity without penalties (though there may be tax to pay) for nursing home care or in case of terminal illness?
What is the current interest rate?
Check out the sales load or other administrative charges.  Are there any other charges?  These all affect your return.
If it is a fixed annuity what is the guaranteed minimum interest rate?

Annuities are not for everyone and it pays to be careful when it comes to purchasing one.  Making the choice to purchase annuity should not exclude another investment.  For many people an annuity is a good option within a total portfolio of taxable and tax-deferred investments.  It is a good idea to seek the advice of a financial counselor before you make the plunge.

Tags: annuities, annuity, bank, bank CDs, certificates of deposit, fixed annuities, interest rates, investment, savings, variable annuity

This entry was posted on Tuesday, August 4th, 2009 at 9:39 pm and is filed under Money Rates. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.