Reasons to Purchase Annuities
Annuities serve many purposes.
If you’re in a money-saving life phase, you can use deferred annuities to:
- Meet your income goals for retirement – Employer-sponsored retirement plans like Keogh, 401(k), and 403(b) help many people plan for their retirement years. However, the amounts you can contribute to IRAs and retirement plans are limited; they may not be enough to support you in retirement. If you began saving late for retirement or you stopped making contributions for a time (because of career changes and family situations), you may want to make up for lost time. Annuities can help you if you have defined-benefit type of pension (if applicable) and your Social Security doesn’t provide you with enough to retire. Remember – inflation will erode your pension income’s purchasing power.
- Diversify your portfolio of investments – Investment experts say you can get the best returns at your chosen risk level by diversifying your investments in a variety of different asset classes. Fixed annuities act as a unique class of assets; these investments are guaranteed to not decrease in value and increase at specified rates of interest. These guarantees are provided by insurers’ claims-paying abilities.
- Manage your portfolio of investments – Investment experts advise people that investing in a number of asset classes can get them too far away from their preferred percentage allocations. To “rebalance” a portfolio to its original formulation, you can shift funds out of faster-growing classes into slower-growing ones. If you employed this strategy with your mutual funds, you would need to pay substantial taxes (capital gains). However, if you use this strategy with your variable annuity, capital gains taxes wouldn’t apply. In the future, you can withdraw funds from your annuity (which might be long after this rebalancing). At that time, you would pay taxes at your ordinary rate.
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If you need income right away, you can use immediate annuities to:
- Prevent your assets from dwindling before your retirement ends – Your Social Security entitles you to retirement income for your entire life, just like defined-benefit types of pension plans. Immediate annuities are the only other indefinite sources of income you can get.
- Keep creditors from taking your assets – Typically, creditors can only access immediate annuity payments as you make them; the money you’ve paid to insurance companies belongs to those companies. Certain court decisions and state statutes protect these annuity payments (at least partially).
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