Everyone who has entered the realms of retirement has to answer a question, “What do I do about money?” An annuity is often a simple answer, but not necessarily the best.
If you happened to buy a fixed annuity in 2006, you are feeling pretty good right now. With 2010 interest rates almost non-existent, a 6% fixed annuity can make you feel both relieved and smug at the moment. You should feel good, because you have a great deal . . . at least for the moment.
In principle, annuities should be a simple investment. Their basic purpose is to give you a monthly flow of income after you hand over to the company (typically an insurance company) a large chunk of your money. Insurance companies are professional investors. They are sufficiently confident in their management of money to offer either -
- fixed annuities, which pay a set amount per month, or
- variable annuities, whose payments can vary within a set of parameters.
The downside for annuities is twofold.
- Your money is committed and no longer accessible to you, and
- The rates of return for annuities are invariably lower, over time, than other investments available at the time of purchase.
As a result, you should be very careful when investing in annuities.
- They are usually a good deal for the salespeople who befriend the senior to whom that are selling, but often may not be a good deal for the senior.
- Annuities can be sold with some very complicated features. If it is too complicated, back off. Especially be wary of any fees that can be added.
- Do not put all your savings into annuities. At most, they should only be one component of your savings.
- If you are considering any annuity from any company, have at least one objective, knowledgeable person look it over carefully.
- Consider other alternatives. Typically, you can set this up yourself by investing the money in a safe fund and pulling a set amount out every month. Usually, this approach will allow you to control your own money and typically cost you less.
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