Even the most inexperienced investors are no doubt familiar with the golden rule of diversification. Mapping a financial future requires keen understanding of the many financial instruments available, in addition to prudent planning. In today’s economic climate, planning for your financial future is more challenging than ever before. With the vast uncertainty looming in every major market, traditional investment vehicles such as stocks can be a risky proposition. Fortunately, there are dozens of other options which are much safer and equally as valuable in accumulating long-term wealth. One such financial instrument is an annuity investment.
What is an Annuity Investment?
In simplest terms, an annuity is an investment vehicle which, in most cases, pays the investor a series of payments in exchange for an initial lump sum investment. In the United States, an annuity investment is most often facilitated by life insurance companies. The investor pays the company a single, up-front premium, and in return receives a series of payments which include interest. The duration of the payments can vary, with some annuities lasting until the person’s death. Annuity investments have a number of distinct benefits thus can be considered a unique financial investment unlike a savings account and other conventional means of financially preparing for the future.
Benefits Of Annuity Investments
- Annuities are tax-deferred. Once the investor pays the initial premium, interest accumulates for the duration of the annuity without being subject to taxation.
- In contrast to stocks and other types of securities, an annuity investment involves relatively less risk, as they are not subject to market trends.
- Most annuities have a fixed interest rate, often between 3% and 6%. Maintaining this rate of return in a stock portfolio over a long period of time can be challenging for individual investors.
Although the interest accumulation on annuities is tax-deferred, withdrawals are not. However, the tax savings experienced during the course of interest accumulation is still more favorable than other interest-bearing financial instruments which are subject to capital gains tax. Using an annuity investment calculator illustrates this advantage.
- An annuity investment of $100,000 over 30 years would result in nearly $15,000 more in payments compared to an investment subject to annual income taxes.
Annuities are attractive options because they provide a stream of income for the extent of the investor’s life. Furthermore, the payment periods are often flexible and can be defined by the recipient. Finally, many annuities are easily transferred to spouses or heirs following the death of the investor.
Is Annuity a Good Investment?
An annuity investment is a good investment for someone seeking lifelong payments with favorable tax benefits. Because the contracting company is legally obligated to distribute payments, there is no risk of losing income or value, unlike other instruments such as stocks. Combined with competitive interest rates and flexible withdrawal options, annuities are certainly an investment vehicle worth considering.