With so many investment options, creating a portfolio that meets your risk tolerance level and moves you toward your financial goals can be overwhelming. Annuities are a great addition to most investment portfolios for a number of reasons. Learn what an annuity is, who might consider investing in them, and some of the best reasons to include one in your investment portfolio.
What Is an Annuity?
An annuity is a financial tool that pays regular payments to an investor once they reach retirement age. Annuities are a type of insurance contract that can carry less risk than other investment types. Many types of investors can benefit from an annuity, but they’re primarily used for retirement planning.
If you’re nearing retirement age and worried you don’t have enough funds, an annuity may be the right choice for you. Of course, an annuity may also be a good addition to your portfolio if you want to increase your monthly income in retirement, even if you already have other funds.
Types of Annuities
You can choose from a few types of annuities, including:
- Fixed annuity: A fixed annuity is an income investment tool that pays you a guaranteed fixed interest rate on your investment for a specific period of time. Fixed annuities offer minimal risk since you’re not dependent on the market’s performance to receive payments.
- Variable annuity: A variable annuity is a contract that pays based on how well the market performs. If the market does well, you’ll receive larger payments. However, if the market declines, your monthly payments will be smaller.
- Immediate annuity: An immediate annuity is an investment that begins issuing payments right away. You invest a sum of money and begin receiving monthly payments right away.
- Deferred annuity: A deferred annuity issues payments at a later date. This gives your investment more time to earn, which can lead to higher payments.
Income and fixed annuities offer a fully guaranteed income or return, whereas variable annuities are performance-based investments. Your best annuity type depends on your financial goals and retirement plans.
5 Reasons an Annuity May Be a Good Addition to Your Portfolio
There are many advantageous reasons to add an annuity to your investment portfolio. Here are some of the top reasons to invest in annuities today.
Guaranteed and Predictable Income
Annuities are a great investment product for guaranteed and predictable income. Pensions, Social Security, retirement accounts, and savings may no longer be enough to cover the costs of retirement, especially if you live many years after you stop working. Adding an annuity to your retirement plans is a reliable way to increase the income you receive. Annuities may also help supplement high inflation as retirement approaches.
Stability and Risk Diversification
Some annuity types, including fixed annuities, have minimal risk. This means adding these annuity types to your investment portfolio can be a great way to diversify risk and offset losses or dips in the market. For example, some investments may take a hit when interest rates are high, but annuities can offset these losses by earning during this time.
In most cases, you know that you’ll minimally get back what you put into an annuity, which isn’t a guarantee that always comes with other investment types. Additionally, most annuities end up paying even more than your original investment.
Customizable Based on Your Goals
Another great thing about annuities is that they’re completely customizable, making reaching your financial goals easier. The age at which you plan to retire, plus how much you need to fund your preferred lifestyle, varies among investors. You can use the different types and payment structures available with annuities to create the best payout plan for you.
Investing in annuities can also reduce your taxable income by allowing you to defer taxes until you receive payments. You won’t owe taxes on your returns when you buy into some annuities until you withdraw the funds. This means you can reduce your taxable liability now, which in turn allows you to invest even more.
Unlimited Investing Opportunities
Most retirement funds have maximum contribution limits. Once you reach this limit for the year, you can no longer invest and take advantage of the benefits. With annuities, you’re not limited to the amount of after-tax money you can invest. Most annuities don’t have limits based on income level or sources of income either.
Investing in annuities doesn’t have to be overwhelming. When you have access to the resources and planning tools you need, you can properly predict your retirement needs and set up an investment strategy that works for you.