The unfortunate reality is that most Americans are not familiar with the basics of personal finance. In a world where a majority of families scrape to get by, living paycheck to paycheck, there’s not enough of an understanding of ways to make and save money.
If you’re looking to change that in your own life, you may be attempting to learn about annuities. There is a lot of talk about fixed annuities there that might feel as if it is going over your head.
Are fixed annuities safe and what do you need to understand about them? These are important matters to get familiar with as they can shape your financial future. Read on and we’ll walk you through everything that you need to know.
What is an Annuity?
If you’re new to the world of annuities, it’s best to start with the basics as things can get confusing fast.
An annuity is a contract that is made between an individual and an insurance company. The individual makes various lump-sum payments over the course of a certain amount of time. In return for this payment, the insurance company in question pays regular disbursements of cash to the individual at some point in the future.
When the insurance company holds onto your money, it grows interest at a certain rate. Annuities are generally seen as a safe way to invest and bring about some extra income. They are most common for people in their retirement years.
The income that is distributed from an annuity is taxed at a regular income tax rate as opposed to a capital gains tax rate, which means more money goes into your pocket as opposed to the federal government’s.
The insurance company will use the money you’ve lent them to invest as they see fit. They often invest in large government funds or high-quality corporate bonds. They will pay back the money you’ve lent them in smaller portions over the course of many years, meaning you’ll have a consistent source of income coming in.
An annuity will typically be established for a certain term time. It might last for one year, five years, or ten years (or many other variations). Your money will be in the hands of the insurance company for this time, with a penalty if you need to take your money out earlier than anticipated.
It can be helpful to think of an annuity as the insurance industry’s version of the standard savings account. It’s a generally accepted way to earn interest with little risk.
What is a Fixed Rate Annuity?
There are various types of annuities, including fixed, variable, and indexed. So, what is a fixed annuity?
The major thing you need to understand about a fixed annuity is that the payment amount that is paid out to you is of a fixed amount. That’s where the name arises from.
You will know exactly how much you’ll be expecting to get each payout cycle. When you sign up for a fixed rate annuity, you’ll be getting security of mind. You’ll be able to plan for your future knowing exactly how much of a payout you can get.
On the flip side, there’s a tradeoff for this predictability and ease. The return that one can make on a fixed rate annuity is often less than that of a variable or indexed annuity.
These forms of annuities typically offer a higher rate of return but also a higher element of risk as well.
This is because your money will be put towards riskier investments and the payout amount will vary depending on how well those investments are doing.
You can learn more about various large investments to see what kind of business your money might go towards in different kinds of annuity accounts.
Are Fixed Annuities Safe?
Your retirement years are important to you. The last thing that you want to do is realize that you’ve put your money somewhere that might damage your financial standing as opposed to contributing to it.
So, are fixed annuities safe? Like all forms of investment, they don’t come completely devoid of some element of risk.
The payouts of any kind of annuity are often based on the individual’s life expectancy. There is a chance when you purchase an annuity that you will do so for a longer length of time than you’ll actually be around.
If you or your loved one passes away before an annuity is fully paid out, the insurance company will get to hold onto the extra money. However, if you pick a term time that is too short, you might end up without the extra cash flow you need to live out your final years.
There is also always the risk that the insurer that you’ve invested with will go out of business, or that you’ll need to pull the money because of an emergency, incurring high fees and potential losses.
While these concerns are worth taking seriously, it’s important to note that most people do not consider fixed annuities to risky an investment. It can be helpful to talk to a financial adviser to see if they make sense for your own personal financial standing.
Understanding Fixed Annuities
There are many financial options available to those entering their retirement years. Investing in a fixed annuity is certainly one of them. However, are fixed annuities safe? The above information can help you understand the potential risks as well as the rewards of this type of financial planning.
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