Understanding Annuities: Pros And Cons Of Annuities

With the world becoming a more expensive place every day, it has become a problem for many people who are looking to retire to get a comfortable amount of money after they stop working.

Many people are invested in retirement funds such as a 401k plan or social security.

However, they often want more guarantee of a viable income after retirement. This is a good opportunity for some people to invest in an annuity. As with all investments though, it is very important to know what you are doing and how to best go about the process.

Understanding annuities can be complex at first, but fairly easy once you get the hang of them.

We live in a world where people are retiring well before the average life expectancy.

With the average lifespan now into the 80's, it is possible for people to spend a third of their lifetime in retirement.

So it is no wonder that they want to set up something like an annuity to help with their retirement.

As with most things of this nature, there are various pros and cons of annuities, just as there are with almost any investment.

Basically, an annuity is an investment which allows a person to defer taxes and collect payments for a predetermined amount of time.

While this sounds great, annuities comes with some downsides as well. This is why personal finance articles like this one can be so helpful for people just starting out on planning for their retirement & financial planning.

If you have already invested as much as you can in your 401k, Roth IRA or traditional IRA, an annuity allows more tax deferred payments to be made for retirement. The tax deferred payments can be attractive because of their apparent level of return.

This can be deceptive and, when considering the pros and cons of annuities, the downside is that fees can often cancel out the benefits of the tax deferment.

While the tax efficiency is attractive, there are setup and administrative fees to consider. In addition, there is a lofty early surrender fee if you need the money sooner than you planned.

Another apparently attractive option are reverse annuity mortgages. This kind of mortgage allows a person to take tax free payments borrowed against their home equity.

For low income seniors looking for lifelong financial aid for personal or medical reasons, it can mean they receive tax free payments until their death.

With the pros and cons of annuities both being considered, it is important to understand what happens when the person passes away.

The biggest drawback is that the lending agency gets complete control of the real estate. This is because the only way most banks will consider a person for a reverse annuity mortgage is if their house is entirely paid off.

With the increase cost of living, most people are well near retirement before they qualify.

Typically the bank will have strict requirements before they will consider anyone for a reverse annuity mortgage.

This may be a good option for someone who requires assistance for the remainder of their life, but the choice is not to be made lightly.

If you want to know more about the pros and cons of annuities and whether annuities are the way for you to go in your retirement financial planning, you should get the advice of asset management advisers and secure your investments for your retirement.

Annuities are like life insurance policies-they transfer the risks and uncertainties from the insured to the insurer. The insurer, or the insurance company, cuts down its risks by gathering a large number of annuities. Gathering together (or pooling) a large number of annuities provides the insurance company an investment capital that it invests in other ventures in order to gain profit. The insurance company uses the profits of those investments to pay off the owner of the annuities or annuitants. The payments will start at a specified date, called an annuitization date.

One good example of how an annuity is paid back to you is similar to the payment of winning lottery tickets. They can be paid off in a single sum, or the payment may be divided to be paid off for several to many years. The deferred payment is an example of annuity. An annuity may be used to ensure income payments that last well beyond the rollover of distribution of a retirement plan. You can purchase an annuity with the lump sum you've received with a pay off of your retirement plan, which can provide you with an annual or monthly income for the rest of your lifetime. The payments may even be transferred to a designated beneficiary in the event of the owner's death. An annuity may also be used to compliment a retirement plan. The IRS has set a limit on the amount of money that can be put into a tax-deferred retirement plan. If you can set aside even more money into your retirement, you can purchase an annuity to provide yourself a long-term investment that will benefit you with more retirement income more than you would have with only your retirement plan. This will make your retirement dreams and life a much better place to be!

So what are annuities? A basic annuity is a plan sold by an insurance company that allows a person to accumulate tax-deferred funds and receive them as a payment after retirement.

Deferring taxes to a later date is a major draw for many people considering annuity for their retirement.

Annuities are also used to leave money for family after you have passed. Because the tax deferred money is set aside, you can often grow your wealth instead of paying taxes after retirement. This means increasing the benefit to heirs after your death and helping them to avoid probate.

Probate is the legal process of resolving all claims left behind by a deceased person. A probate is used to determine who is the sole heir or if there are multiple people with claims on the deceased person's estate.

Probate can not only be an extreme headache for family, but it can result in the estate of the deceased person being distributed in a way they would not have wanted.

Understanding annuities is important if you have family you wish to leave certain assets to or certain family you do not.

Another reason people choose to invest in an annuity is for guaranteed income. Similar to a CD from a bank, an annuity may be shorter term and allow a person to collect the money they have invested over a short or long period of time.

When understanding annuities, it is important to recognize that many people are looking to collect the money after their retirement, rather than defer the funds until after their death.

This is another reason an annuity can ease the expenses of retirement. With the tax deferral, they also allow a person to grow their wealth heading into retirement, making annuities an attractive option.

Understanding annuities is a complicated process that needs to be addressed at the individual level.

Hiring an asset management advisor is a great way of making sure an annuity is right for you and determining which one is best.

While they are an attractive option for those planning for retirement or for their heirs, they should be approached with a certain amount of knowledge. Working with an asset management advisor is a great way to ensure you are doing everything you can to plan for your family's future.

While considering the pros and cons of annuities, there appear to be many positive aspects. The positive aspects are always plain to see. The problem is that there are also many smaller negative effects which can be initially hidden or even disguised by the lender.

Some people do not notice these small fees and deductions until they have already gotten too deep into the agreement. These plans should never be entered into without assistance. An asset management advisor can help with that.

Working with an asset management advisor can make the process much easier to understand and keep you from being led into a financial trap.

Fixed, variable, deferred and immediate are terms used to describe the kind of annuities that are available to the average investor.

But in a random sample, investors had a more basic question than what kind of annuities are available; they wanted to know, " What are annuities?"

An annuity is defined as an agreement between an investor and a financial institution or insurance company whereby the financial institution or insurance company promises to pay out a guaranteed sum of money at agreed upon intervals for a specified amount of time.

The investor purchases the annuity in order to receive a steady income at a later time in their life such as retirement.

A number of factors should be taken into account when considering an annuity. The first question to be answered is how long you, the investor, want to receive payments. Since an annuity is in essence a retirement income tool, recipients typically want to receive money throughout their retirement years.

The next consideration is tax sheltering. Most recipients also benefit from the tax shelter that annuities provide. Contributions reduce taxable earnings in the year that they are made and earnings and investments increase every year tax-free until the recipient begins to draw an income from them.

A last consideration is probably the most important: can you safely make the investment in an annuity without anticipating ever needing an early withdrawal?

Since annuities are considered a retirement tool, there are generally substantial penalties for withdrawing before funds have accumulated for a minimum number of years or before the recipient has reached a minimum age.

If the first three considerations are positive, it is time to consider how to structure your annuity.

Annuities have two fundamental structures: immediate and deferred. An immediate annuity requires a lump sum investment into the annuity account. It then begins making payments to the recipient as stated-immediately.

This is the type of annuity that is purchased on behalf of lottery winners or chosen by beneficiaries of large inheritances. Immediate annuities can provide a guaranteed income for life.

A deferred annuity is structured so that the investor can contribute over a long period of time in order to build a fund that can be distributed throughout retirement years.

Since the contributions grow tax free and the tax savings compound over the term of the annuity, the investor's contributions are greater than they would be a money market savings account. Such benefits make the deferred annuity attractive for a young investor.

A final consideration for the annuity investor is how the money will be disbursed. Fixed annuities guarantee a level or fixed amount every month. It is a low-risk option.

A variable annuity is a little riskier as it offers the investor a guaranteed income benefit, but leaves the annuity in a managed portfolio. Any excess income earned is then given on an annual basis.

With so many different structuring options available, it is easy to see that annuities are flexible enough to fit individual investment needs and goals. So to stop asking yourself the question, " What are annuities?" just consult with a professional financial advisor and decide which annuity is right for you.

"In today's market long term stock investments are two weeks where they used to be 10 years. This is why it is crutial to have the right financial advisor assisting you."
- A Farnsworth

"If you need heart surgery you don't go to the book store and buy a do-it-yourself manual. You want the very best heart surgeon that money can buy. Investing is the same. You want the best financial advisor, bar none."
- T Henderson

Financial advice is literally everywhere. Everybody has an opinion to give it seems, friends, family, neighbors and even strangers.

A lot more people therefore are going to financial planners.
They consult these advisers in the belief that these people know better.

Here are some things you would want to know about your financial planner

1. Is the person qualified?

Anybody can say that he or she is an expert financial planner. No particular degree or experience is required. There is no department of government that oversees planners. Of the quarter of a million financial planners, only an approximate of 40,000 are CFP (Certified Financial Planner). The CFP is the most acknowledged designation for financial planning.

Even with this certification, there are no guarantees. It takes experience and continuous education plus a high degree of ethics and integrity to be a professional planner.

One excellent option is to check his CFP status as well as his PFS (Personal Financial Specialists) and ChFC (Chartered Financial Consultants) status.

2. Is he looking after your interest or his?

Professional financial planners take their duties on your retirement plans seriously. Your needs are ahead of his or hers.

Unfortunately, most of the so called financial planners are just trying to sell you investments. They are not obligated to provide the best retirement plan but are only prevented from selling you an unsuited plan.

The best option is to ask the financial planner to furnish you a printout of code of ethics that he needs to comply. It is a difficult read, but knowing the standards which your planner abides is a must.

3. How is your planner getting paid?

Several financial advisers still get most of their income through commissions. Many gracefully slide through the 'commission' tag by giving themselves the title 'fee-based' financial planners. They also simply duck the compensation subject.

Commission is not really bad, but it does create a complexity of interest with the retirement planner. Your retirement planner should voluntarily tell you how he gets paid, or at least give a direct answer when asked.

4. A slice of the pie or the whole thing?

An excellent financial planner takes into account the whole financial situation of a client, including their plans for estate and budgets. That is the only true way of looking at a comprehensive retirement plan.

Most of these financial planners simply focus on a single projection of a client's financial situation. In most cases, they focus only on the area in which they have received any training.

When your adviser focuses on a single or only a few aspects of your retirement plan, get one that will take into account your entire situation.

5. This is what I'm selling. This is what you must buy

Financial planners that do not have the necessary education in comprehensive retirement planning often rely on what their companies require them to invest in.

For example, a stockbroker may possibly hard sell certain mutual funds or individual stocks. This is also true even when the best utilization of the money is on paying the mortgage or raising the emergency fund.

Your retirement planner must be able to discuss intelligently about methods other than his recommendations. If he is not able to, or simply insists that his way is the best way, look for another adviser.

Investing in your financial future is the greatest gift you can give yourself by far.

If you aren't sure where to begin or how, perhaps it's time to seek the services of a qualified financial advisor. His advice may prove invaluable and may give you a much more comfortable future than you would have ever imagined left to your own devices.

Click this link to arrange a free retirement financial planning consultation with one of our highly ranked financial advisors.