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Annuities - The Alternative to IRAs and 401k Plans

Annuities, also known as personal pensions, have gained popularity since the recent crisis on Wall Street has shown the general population just how volatile the market is. Because of this crisis, many people have seen the money they’ve been sticking away in their IRAs and 401ks suffer. Annuities provide people with a guaranteed source of income when they retire. How they work is you pay an insurance company either a lump sum of money or installments over a period of time. In exchange, the insurance company provides you with a payout each month after retirement. These payouts can be guaranteed for a set period of time, or for the lifetime of the annuitant.

A person can choose between three different types of annuities. The first type is called a fixed annuity. This type guarantees the annuitant a set amount of money each month. The insurance company also guarantees that you will earn a minimum rate of interest during the time that your annuity account is growing. This is considered the safer option of the two, but the payment typically does not rise with inflation. The payments on a fixed annuity may last for a definite period of time, such as 10 years after you retire, or for an indefinite period, such as your lifetime or the lifetime of a spouse or family member.

The second type of annuity is known as a variable annuity, and is considered the riskier of the two annuities. With this type of annuity, the payments may fluctuate depending upon the performance of the annuitant’s investments. Mutual funds are an example of one of the investment options for variable annuities. Variable annuities give those that go with this option the potential for a higher payout, but also have the risk of giving a lower payout amount as well. With the current market situation, many are staying away from this type of annuity.

The third type is known as an equity-indexed annuity. This annuity is a special type of contract between the annuitant and the insurance company. While you’re making payments or when you first pay the lump sum for this annuity, the insurance company will credit you with a return that is based on changes in an equity index. Insurance companies typically guarantee a minimum return on these annuities, though the guaranteed minimum return rates will vary. As with the other types of annuities, the insurance company will make periodic payments to you under the terms of the contract that you agreed to, though some annuitants choose to receive the value of the contract in one lump sum.

To purchase an annuity, you need to locate an insurance agent that is licensed to sell annuities in your state. Some of the contract features that you should make sure you understand before purchasing an annuity include surrender charges, equity indexed based interest credits, and bonuses. Also, if the sales person provides you with any computer printouts showing the payouts of an annuity contract in the future, be sure to ask whether the figures are guaranteed or illustrated. The insurance company is not contractually bound to pay illustrated figures, but they are on guaranteed ones.

While annuities may provide an excellent alternative to IRAs and 401k plans, they shouldn’t be the only thing that you invest in for your retirement portfolio. Some still recommend investing in the market so that you may have an investment that can grow with time. You will also want to be sure that you have enough coming in to cover any expenses that you may have, as well as provide you with extra cash to have on hand in the case of an emergency.

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