Why should I consider purchasing an annuity?
Annuities can serve many useful purposes.
If you are in a saving-money stage of life, a deferred
annuity can:
- Help you meet your retirement income goals. Employer-sponsored
plans such as a 401(k), 403(b) or Keogh are an important
part of planning for retirement. However, contributions
to these plans and to IRAs are limited, and they
might not add up to enough for the retirement income
you need, especially if you started saving for retirement
late or had contributions interrupted—perhaps
due to job changes and/or family responsibilities.
Moreover, your social security and defined-benefit
pension (if you have one) may provide less than you
need to retire. Remember that the purchasing power
of defined-benefit pension income is eroded by inflation.
- Help you diversify your investment portfolio. Investment
experts routinely advise that, to get the best return
for a given level of risk, you should diversify your
investments among a number of asset classes. Fixed
annuities, in particular, offer a unique asset class—an
investment that is guaranteed not to decrease and
that will actually increase at a specified interest
rate (and, often, potentially more). The guarantees
are supported by the claims-paying ability of the
insurer.
- Help you manage your investment portfolio. Investment
experts routinely advise that, whenever your investments
in various asset classes get too far from the percentage
allocations you prefer, you “rebalance” to
the original formulation, by shifting funds from
the classes that have grown faster to the ones that
have grown more slowly. If you do this with mutual
funds, you pay capital gains taxes; if you do it
in a variable annuity, you don’t pay capital
gains taxes. When you eventually withdraw money from
the annuity (which could be many years after the
rebalancing), you pay tax then at the ordinary income
rate.
If you are in a need-income stage of life, an immediate
annuity can:
- Help protect you against outliving your assets. Social
security pays retirement income for as long as you
live, as do defined-benefit pension plans. But the
only other source of income available that continues
indefinitely is an immediate annuity.
- Help protect your assets from creditors. Generally
the most that creditors can access is the payments
from an immediate annuity as they’re made,
since the money you gave the insurance company now
belongs to the company. Some state statutes and court
decisions also protect some or all of the payments
from those annuities.
Source: Insurance Information Institute
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