An annuity is an investment which an individual makes to ensure a lifetime income. There are different types of annuities. These are Indexed annuity, variable annuity, fixed annuity, immediate annuity, deferred annuity and retirement annuity.
Equity Indexed annuities grow depending upon the performance of an underlying stock market index. It is a good source of investment if the stock market is in an upward cycle. In an indexed annuity the principal is guaranteed and the profits are locked in. As a result investors do not lose their money. The annualized rate of return for these kinds of products can be anything between 5% to 9%. The best time to invest is when the stock market is depressed.
A variable annuity allows an investor to grow investments in portfolios. This is one of the most preferred methods of annuity investments because the money is invested in conservative stocks and the payments are tax deferred. Investors can choose the method of payouts. The expected rate of return for variable annuity is 8% to 10% assuming equity accounts are selected.
Fixed income annuities come with a time frame of 5 to 15 years. This type of annuity is more suited for conservative investors to ensure that their principal is guaranteed. The insurance companies which manage the fixed annuities place the funds in government securities or in bonds of stable companies. At present rates one can expect a return of 4.5% on an investment of $100, 000 but check rates with your retirement advisor as many companies pay more.
Another form of annuities that is gaining popularity is immediate annuities because of the aging population. As the name suggests an investor in these annuities start gaining on their investments as soon as it is made. The rate of return on immediate annuities depends on many factors such as age, gender, investment amount, and type of payout.
The next type of investment in annuity is deferred annuity. In this arrangement, the investor benefits from tax benefits on the investments made. The withdrawals from a deferred annuity are made after retirement to enjoy the golden years of one’s life. The returns from deferred income are taxable. A fixed deferred annuity will give a steady rate of return. Investors can choose the mode of investment in the arrangement-either as a lump sum or payments made over time. The rate of return of a deferred income arrangement will depend on the investment corpus, starting age of the investment and whether the payout is in a variable or fixed mode.
The most common and oldest rate of annuity is retirement annuity. People invest in these types of investment vehicles to ensure that they get a steady return after their retirement. Retirement annuities are offered as an option at retirement, as settlement of a pension payout. In this type of instrument, investors can choose between a fixed return and a variable return.
Investors have been investing in annuities to safeguard their future incomes. The annuity rate of return can be lesser than other investments such as equities or foreign exchange. However they will always remain as one of the the favorite retirement options of retirees to ensure long-term returns and stability.