Whether you are concerned about outliving your investments, or the stock market is not a safe place for your money, annuities can be a safe and sound alternative.
An annuity is an insurance product that pays out income, and can be used as part of a retirement strategy. Annuities are a popular choice for investors who want to receive a steady income stream in retirement.
Here’s how an annuity works: you make an investment in the annuity, and it then makes payments to you on a future date or series of dates. The income you receive from an annuity can be doled out monthly, quarterly, annually or even in a lump sum payment.
Fixed annuities are essentially CD-like investments issued by insurance companies. Like CDs, they pay guaranteed rates of interest, in many cases higher than bank CDs.
Unlike their fixed counterparts, variable annuities are designed to pump up your savings by giving you a chance for long-term capital growth. They do this by allowing you to invest in anything from half a dozen to 20 or so stock or bond mutual-fund-like portfolios called subaccounts.
An equity-indexed annuity is a combination of a fixed and a variable annuity. In addition, it has both a Guaranteed return: As with a fixed annuity, you get the low-risk appeal of a guaranteed minimum return (usually 2% to 3%), and you also have a shot at higher gains if the stock market rises, since an equity indexed annuity’s return is also tied to the performance of a benchmark index, such as the Standard & Poor’s 500.