In the past, Retirement Planning used to be a lot EASIER. Your Parents and Grandparents work on a company for their whole careers and upon retiring were paid a pension that continued to provide them an annual income every year of their retirement no matter how long they live.
Simple Isn't it?
However these days, Pensions are all but extinct as the burden of retirement planning has shifted from the Employers to the Employees. Now that they are responsible for their own retirements, many workers are looking for ways to recreate the annual income stream that traditional pensions provided without having to worry about running out of money at their retirement.
For these folks, annuities are an attractive option.
Annuities are an investment vehicles that generally offer safety from loss, while providing the ability to grow money which you'll annuitize at retirement. Basically turning what you've accumulated into a life long income stream that is guaranteed to last as long as you do.
There are 2 Types of Annuities: Variable and Fixed
In Variable Annuities: Your Principle is invested in the market and can grow and shrink depending on what the market does. This is a riskier type of annuity as you can lose principle if the market drops. But do you have the potential for higher upside if performance is good.
In a Fixed Annuity: Your Interest rate is set and will not change despite what the market does. This is the most conservative type of annuity with the most predictable results. You're guaranteed to never lose any principle but growth will be relatively modest.
There is a special type of Fixed Annuity which offers the best of both worlds. The safety of a traditional Fixed Annuity and the Upside potential of a Variable Annuity.
A Fixed Indexed Annuity or FIA will credit interest base on the performance of a market like a variable annuity but establish what is known is a Ceiling and a Floor to minimize Risk. The Floor is usually around 0% and will ensure that no principle is loss if the market goes down. In return for the safety of the floor a Ceiling will also be established and will limit the gains your money can be credited in any given period.
Think of a Indexed Annuity as Building your Retirement Sky scrapper, When conditions are good, Upward Progress is made. There is no limit to how high you can build, only how much you can build at any given period. When conditions are bad, your construction are paused but you won't lose any progress either. And when conditions are good, construction resumes.
In a Nutshell, The Most important thing isn't how big the pile of money you can create before retirement but the assurance that you'll never outlive that pile. That piece of mind is what annuities bring to the table that other retirement vehicles don't.
Most insurance companies are required by their states to department of insurance that the annuity you choose is suitable for your age, financial situation and retirement goals. That being said it is important to work with a Financial Advisor you trust.
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