Cents and Sensibility
Cents and Sensibility
Annuities can help build
retirement savingsQuestion: I'm unhappy with the low interest I'm receiving on my savings and am looking for alternatives. I've heard about annuities, but don't know anything about them. Can you explain how they work?
Answer: Annuities offer a variety of benefits, including the following:
>> Tax-deferred growth of earnings. When you invest in a deferred annuity, you pay no taxes on your earnings until withdrawal, so your money will grow faster than it would if placed in an investment on which you paid taxes every year. However, if you make withdrawals before you reach age 59 1/2, you may have to pay a 10 percent early withdrawal penalty, plus an additional sales charge.Deferred annuities may be either fixed or variable. When you purchase a fixed annuity, you receive a guaranteed interest rate during the "accumulation" phase -- the time in which you pay money into the annuity. You also will receive a fixed payment amount when it's time to start making withdrawals.>> High contribution limits. You can basically invest almost any amount into an annuity, although some restrictions do apply.
>> Variety of payout options. An annuity can provide you with an income stream you can't outlive. But you also can decide to accept payments for a certain period of time, such as 10, 15 or 20 years. If you were to die before that period was over, your beneficiary would receive the payouts for the remainder of those years.
If you want some growth potential, you may be interested in a variable annuity, which can offer a variety of investment options, including pools of stocks or bonds, or a mixture of both. When you start taking withdrawals from a variable annuity, you can either receive a fixed payout, a variable payout or a combination of the two. If you choose a variable payout, the amount of each payment is based on the performance of your investments.
When you purchase a variable annuity, you will incur some risk, as the value of the stocks, bonds or other vehicles within the annuity fluctuates over time. You could end up receiving less than your original investment.
Ultimately, the type of annuity you choose will depend on your individual needs, goals, diversification requirements and tolerance for risk. You may want to own a combination of fixed and variable annuities.
Guy Steele is a financial planner and head
of the Pali Palms office of Edward Jones. Send
planning and investing questions to him at 970
N. Kalaheo Ave., Suite C-210, Kailua, HI, 96734,
or by email at: gsteele2@pixi.com