There is an unbendable and unbreakable law of economics that states that wealth is created in one of only two ways: people working, or money working. Many have attempted to break this law, and usually the results have violated both civil and criminal laws.
These days, everyone is anxious to put their money in a safe place. This "safe place" would also preferably have low risk, competitive returns, tax advantages and be ready when they retire.
A respected commentator in the sports world put it plainly: "Let's take a look." Investors who once expected returns in the 5%–12% range now face much lower return expectations, even as some willingness to take on risk returns to the market.
Long-term government, municipal and high-quality corporate bond yields have declined compared with past decades, and deposit rates at banks and credit unions are often well below historical peaks. Certificates of deposit, once considered among the safest investments by older generations, now pay considerably less in interest than they once did.
Previously, CD investors could expect higher rates without locking up funds for long periods. Today, the highest advertised rates often require longer terms, so liquidity and term flexibility are important considerations for many savers.
Basic concerns
- Principal safety
- Return rate
- Liquidity, or access to funds on short notice
- Flexible term, which depends on when the investor wants the money
- Tax-free
- Reliability and trustworthiness
Taking all of these factors into account, is there an investment that can satisfy most of them? Surprisingly, the answer can be yes for some savers: fixed annuities. An annuity can guarantee the safety of both payments and principal by contract to the policyholder and can also guarantee that the owner will not outlive his or her money if the owner chooses to annuitize the contract.
When planning for retirement, people often compare products and strategies across vehicles and providers; for information about related investment products and insurance options, see Mutual Funds and Investments Insurance.
Unlike many bank products, earnings credited to an annuity are generally tax-deferred until distributed, which allows capital to grow through compound interest without annual taxation on the credited interest. This tax treatment is one reason annuities remain attractive to some investors.
There are many annuity programs, including equity-indexed annuities, that provide additional features such as a guaranteed minimum rate plus the ability to participate in some market gains. Depending on contract terms, annuities can offer investors returns that compare favorably with other conservative instruments available today.
Because retirement planning often involves evaluating living and care considerations in addition to income planning, some people also review insurance and services for retirement living; see Retirement Living Centers Insurance for related options.
Although annuities have long been part of retirement strategies, they may be especially attractive in a low-yield environment for investors seeking contractual guarantees and tax deferral. As with any financial product, suitability depends on personal circumstances and contract details.
Liquidated earnings are subject to ordinary income tax, may be subject to surrender charges, and if taken prior to age 59½ may be subject to a 10% federal income tax penalty. Guarantees and lifetime income payments are contingent on the claims-paying ability of the issuing insurance company.
Frequently Asked Questions
What is a fixed annuity?
A fixed annuity is an insurance contract that credits interest at a guaranteed rate and can provide guaranteed periodic payments for a set term or for life when annuitized.
How are annuity earnings taxed?
Earnings in an annuity grow tax-deferred and are generally taxed as ordinary income when distributed, not while they remain in the contract.
Can I access money in an annuity if I need it?
Many annuities offer some liquidity through free withdrawal provisions or penalty-free amounts, but withdrawals beyond those limits may incur surrender charges and tax consequences.
Are annuities safe?
Annuities offer contractual guarantees backed by the issuing insurer, so safety depends on the financial strength and claims-paying ability of that insurance company.