Is the mere mention of the word “annuity” enough to make your eyes glaze over?
If so, we get it. Annuities have a long reputation of being difficult for the average consumer to understand. But that doesn’t mean you should ignore them. After all, your smartphone once seemed hard to figure out, too, and chances are, now you’re using it to read this article.
Instead, let’s learn a bit more – what’s the definition of annuity, what are the pros and cons of annuities, and how one might fit into your retirement income strategy.
What is an annuity?
In the simplest sense, an annuity is a financial product you buy from an insurance company. You make deposits into the product over time and earn interest on your money. Then, when you retire (or whenever you’re ready to receive income), you begin taking a regular stream of payments – like a paycheck – from your account.
If that sounds a lot like an IRA and/or a CD1, you’re right, there are definitely some similarities among all retirement savings vehicles – after all, each is designed to help you work toward the same goal.
Annuities Pros and Cons
Below are just a few of key comparisons of the benefits and drawbacks of annuities. To get a more detailed understanding, you should talk with your professional advisors.
Are there different kinds of annuities?
Yes, Farm Bureau offers three types of annuity – fixed, indexed and variable. Each has its own unique benefits and which one is right for you will depend on factors like your age, how risky you want to be with your money and even how much you have to invest. You’ll want to discuss each option with an agent before making a choice.
A Fixed Annuity is perhaps the simplest of the annuity family. You make deposits to your annuity contract and earn a pre-determined annual interest rate from the company you purchased with. In most cases, you’re also given a guaranteed minimum interest rate which means you know that you’ll never earn less than that amount on your investment each year. There is a very low level of risk with this type of product.
Variable Annuities play on the opposite side of the risk spectrum. As the name implies, a variable annuity earns interest based on the market. You can choose where to invest your annuity and you earn returns based on those investments – you have the opportunity to earn much higher returns, but also the chance to lose money if the market has a down year.
One of the most popular annuities today is the Indexed Annuity. This product is a blend of its fixed and variable relatives, and that does make it a little more complicated. With an indexed annuity you can have the opportunity to earn higher returns than a fixed annuity, and be protected from the risk of losses that you might incur with a variable annuity.
How do You Know if an Annuity is Right for You?
Whether an annuity is the right fit for your world is up to you. Some examples of times when an annuity might make sense include:
- If you’re an investor looking for a steady stream of income throughout retirement
- If you’re an investor looking for a relatively safe way to grow retirement funds, but desiring higher returns than the bank offers on a product like a CD
- If you’re an investor ready to put money aside for a number of years – annuities do come with early withdrawal penalties
One thing is for sure, the decision to purchase an annuity is one you should discuss with a professional. Your local Farm Bureau agent can help you understand your options and create a retirement strategy that works for your world.
1 Bank CD’s are FDIC insured, annuities are not federally insured.
2 Guarantees are based on the claims-paying ability of Farm Bureau Life Insurance Company.
Neither the company nor its agents give tax, accounting or legal advice. Consult your professional advisors in these areas.