Thursday, February 24, 2011
Fixed Annuities: Escape from Stock Market Uncertainty
Investors, especially those that experienced considerable losses and watched helplessly as their investment portfolios fell to pieces during the last stock market crash, are making much more cautious investment decisions today. A fixed annuity has gained a great deal of investor appeal for many cautious investors. Compared to alternative investments of equal risk, the fixed annuity has several significant advantages.
Fixed Annuity Advantages
There is the chance of significant appreciation when a lump sum is invested into a tax-deferred annuity, and the process is much quicker than a savings account or CD. The element of tax deferral is one of the most appealing advantages. Unlike other options where earnings are taxed each year, the tax-deferred annuity also allows taxes to be delayed or deferred until the money is withdrawn.
Another attractive fixed annuity advantage is the opportunity for guaranteed lifetime income. There is much debate about the future, potential of insolvency, and possible ineptitude surrounding the Social Security program(s). Many are fearful that the system will resort to a drastic decrease in benefits or entirely dissolve benefits. Comparatively, the guaranteed income of a fixed annuity is much more attractive.
The Baby Boomer generation, in particular, has lost faith in the federal government's ability to contribute to their retirement income. This group is also not very prone to placing faith in the stock market or any volatile index investment. Instead, the Baby Boomer generation tends to opt for the less glitzy guaranteed return from a fixed annuity.
How to Choose a Fixed Annuity
First, you will want to find a company that has a stable and steady track record, as the annuity will most likely need to last you 10-30 years post-retirement. A sign of adequate financial stability can be found using a Standard and Poor's rating. An "A" rating by a firm like this is usually a good indicator of stability. Make sure to look back at past ratings too; the goal is consistently high ratings for several years.
Peruse the numbers carefully. An unusually high guaranteed interest rate may be indicative of sizable fees, which will definitely decrease the return on your annuity.
You should also determine if there is a penalty for early withdrawal and the circumstances where the penalty might be waived. Generally, a fixed annuity will have a penalty or "surrender charge" if you withdraw the funds early. The penalty will usually phase out in seven to five years. However, some annuities feature a wavier of withdrawal penalties if you are critically ill or confined to an extended care facility.
The professional advice of a financial adviser can be an invaluable asset when considering a fixed annuity.
Liquidated earnings are subject to ordinary income tax, may be subject to surrender charges and, if taken prior to age 59 1вЃ„2, may be subject to a 10% federal income tax penalty.
Guarantees and payment of lifetime income are contingent on the claims paying ability of the issuing insurance company.