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As someone involved in investing for retirement, one of the
options that’s fallen by the wayside is the annuity program.
Annuities used to be the only life care program available; the
creation of Independent Retirement Accounts and Roth IRAs and
employer managed 401(k) programs.
When factoring the three variables of Security, Liquidity and
Rate of Growth, most annuities are a good mixture of assets and are
an excellent asset preservation tool for a retiree.
Annuities are purchased from
investment brokers who take your purchase price and put them
into a low-risk investment pool. With several billions in
aggregated investments, these can get excellent rates of returns.
Most annuities are invested into state and municipal bonds or funds
of state and municipal bonds, with some anchored by Treasury bonds.
When you purchase an annuity, the investment broker will run
through actuarial tables, factoring in your age, your health risks,
family status and a bunch of other factors. From the perspective of
the investment counselor, the purpose of an annuity is to make a
small profit for the company and there are several factors tied
into this.
In terms of Liquidity, annuities are not particularly liquid.
You’ll get a monthly payment for as long as the annuity runs
and that payment will never adjust for inflation. When purchasing
an annuity, keep in mind that with a 4% inflation rate (roughly
what the US has as an average), prices will double by the rule of
72. Divide 72 by the inflation rate and you’ll find out how
long it’ll take for prices to double. This translates to a
doubling every 18 years. (As a cross check, if you look at the
price of a hamburger now, versus what it was in the late
‘80s, you’ll see that this holds true decently well.)
As a result, look at how much the annuity will be paying you
towards the end of the term as opposed to the beginning, to get the
best utility for your own use.
Annuities tend to have low rates of growth; in fact,
they’re not so much a
wealth generation investment tool as a tool to disburse your
wealth while you’re freed from the hassle of managing it.
Most annuities have interest rates to preserve the payments in the
realm of 4-6%. This works well for hedging against inflation, but
not for generating new wealth from your existing assets. As the
final step in getting the benefits of a
retirement portfolio annuities are one of many tools worth
considering.
Annuities do have the benefit of being mildly
tax deferred. The interest they accrue before they mature
isn’t taxable until you start pulling money out of them.
Annuities are also worthwhile purchases if you know you’re
going to have recurring monthly medical expenses. It’s a
comforting feeling to know that your health care each month is
covered.
Like all investments, annuities are tools and not panaceas.
Carefully weigh all your options when considering one.
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