Fixed Annuities and the Stock Market
Fixed Annuities and the Stock MarketJun 14
With the recent volatility in the stock market, annuities can provide a safe alternative for those interested in investing. Unlike bonds, they don’t lose value when interest rates increase.
An annuity may sound complicated, but it’s actually a fairly simple concept. An annuity is a contract between an individual and an insurance company. If you are the individual, then you would make either a single payment or a series of payments to the insurance company. You can either keep the money in the annuity, growing tax-deferred, or you can have the insurance company make periodic payments to you beginning immediately or starting at some future date.
Some types of annuities will guarantee a yearly interest rate and others have formulas which will pay interest based on the growth of an index like the S&P 500. These types of annuities are called fixed indexed annuities.
Annuities may be a good choice in a market like the one we’re experiencing today. Your principal – the amount you initially contribute to the annuity – is guaranteed by a large, established and well rated insurance company; if you’re investing in a fixed-index type of annuity. A drawback of an annuity is if you are under 59 ½ and take a withdrawal, you will pay a premature withdrawal penalty imposed by the IRS, because this is a tax-deferred vehicle.
Annuities have other benefits too.
- They have been around since the 1900’s, so they’re proven investment vehicles
- They are easy to purchase with no upfront sales charges
- They aren’t subject to probate as they pass directly to your named beneficiary
- They can go into an IRA or 401(k)
- Some have a long term-care rider, which will enable you to pay for long-term care expenses with tax-free income from the annuity
The book “Naked in the Nursing Home” shows you how annuities helps you pay for long-term care insurance in greater detail.