Your Best Investment Could Be an Annuity?

You’re looking for your best investment option and need an investment that is safe and pays a high income. Your best investment could be an annuity, but be careful. The wrong annuity is anything BUT your best investment.

These days lots of folks approaching or in retirement are searching for a high guaranteed income. Scenario: Your financial planner or insurance agent recommends an IMMEDIATE ANNUITY as your best investment. Here’s the deal.

You write out a check for $100,000 and the insurance company pays you $500 per month for life, period. You can not outlive this income and it is guaranteed by the issuer, the life insurance company. Considering that you can’t even get 3% a year in interest from the bank, is the immediate annuity your best investment, or should you look at other investment options? Earning 3% in the bank you would only get interest income of $3000 a year.

Let’s say that you write out the check and 20 years later you die. The $100,000 is gone, because you traded it to the insurance company for a guaranteed income of $500 a month or $6000 a year. That means that over 20 years they paid you $120,000 in income in exchange for $100,000 up front. That’s how the most basic immediate annuity works, and in this case you did not find the best investment out there.

IF you are sold on the concept of a guaranteed income for life, shop around for your best immediate annuity deal because some pay more than others. Frankly, I suggest you look at other investment options. For example, what do you think the life insurance company did with your $100,000? Most of it they invested in bonds, using the interest income from these investments to pay you your guaranteed income. Why not just skip the middleman and invest in bonds yourself?

You could simply invest $100,000 in high quality bonds with a 6% coupon rate and earn $6000 a year in interest. When your bonds mature in 20 years or so you get your money back. At that point you could invest this money and buy more bonds. Or, your best investment could be a different type of annuity called a retirement or tax deferred annuity. The simplest of these are called fixed annuities, and they pay competitive interest rates that are deferred from income taxes until you withdraw money. Here’s how a basic tax deferred fixed annuity works.

When you are a few years away from retirement you put your $100,000 (or more or less) into a fixed annuity. It then earns a competitive interest rate and grows uninterrupted by taxes as long as you own it. Then when you are retired and NEED an income you pull money out of it each year (called a partial surrender). Make a plan so you will not be digging into principal and eventually run out of money. When you pull money out to use as income, it will be subject to income taxes.

The good news is that you should be in a relatively low tax bracket at this point in time, and may not actually have a tax liability if your other sources of income are not significant. Your tax person can help you make a plan to keep your taxes at a minimum. Before you invest in any annuity, shop around. Payouts differ from one immediate annuity to another, and interest rates vary in the fixed annuity category. And sometimes your best investment in either annuity type will depend on the features offered.

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