At the start of each year, many people begin thinking about the future and planning for retirement. One popular investment choice for many is the annuity. However, there are many different kinds of annuities. It may be difficult for those new to investing to tell the difference. To help, below is an overview of the three top retirement annuities of 2015.
One of the biggest trends in 2015 has been a move towards longevity annuities as a means of funding retirement. Like all annuities, longevity annuities are purchased from insurance companies. The investor usually gives a lump sum payment to the insurance company. In exchange, the insurance company will begin making payments to the investor at some agreed upon date in the future.
Longevity annuities get their name form the fact they are used to hedge against the possibility of a person outliving their other retirement savings. This differentiates them from another common choice, immediate annuities.
With an immediate annuity, the payments begin immediately. However, longevity annuities don’t begin paying out for quite some time. This could be 20 years or more. Due to the fact the investment can make money during that time frame, the eventual periodic payouts are also usually larger.
Fixed Index Annuities
Fixed index annuities have also been rising in popularity as a retirement annuity choice. Fixed index annuities combine the benefits of the traditional fixed annuity’s stability with the possibility of profiting from the performance of markets.
However, unlike stock based investments like 401(k) plans, there is no possibility of losing money. The investment made by the insurance company will earn interest at a fixed rate guaranteed by the insurance company. There is also the possibility of being paid more money since taxes on the funds are deferred until they are collected by the investor.
Lastly, variable annuities have recently surged back into popularity. Variable annuities differ markedly from fixed annuities. Like a fixed annuity, a person makes an investment with an insurance company with the guarantee of payments at a later date in time.
In the case of variable annuities, however, there are two components to the payments made. First, there is the part of the payments that represents a guaranteed minimum amount of money. Second, there is the part that could fluctuate based on the performance of the investment. This is where the name variable annuity comes from. Unlike fixed annuities that always pay out the same amount, the payments could differ based on the performance of the investment portfolio created by the insurance company.
Variable annuities also include a death benefit that comes into play if the investor dies before the plan makes any payments. In this case, an assigned beneficiary will be granted access to the funds. While they won’t receive periodic payments, they will at least be given the amount originally invested into the annuity.