3 Annuities to Help Your Savings Grow Even Faster
It’s an excellent time for interest rates if you’re buying a house, but it’s not so great for investors. Whether you have a savings account or a certificate of deposit or a Treasury bond, the low interest rates mean that you may even be losing money on those investments, if you factor in inflation and income taxes.
These considerations are especially critical for those nearing retirement age or enjoying their golden years right now. You need your savings to generate enough income for when you retire.
So if these traditional methods for saving aren’t the best answer right now, what is? To generate a higher guaranteed rate of interest, consider these three fixed annuities as a promising alternative.
1. Fixed-Rate Annuities
Like a bank CD, a fixed-rate annuity offers a certain amount of interest over a defined period, but the annuity provides higher rates than you find with a CD. To start the year, a five-year fixed-rate annuity had a 3% interest rate, three times the rate for a five-year CD. The disparity holds for shorter periods, too, with a 2.4% rate on a three-year fixed annuity compared to 0.85% for a CD.
Since a fixed-rate annuity locks you in for several years, you want to ensure you have the highest rate. With rates falling right now, it’s the right time to act, as rates have already dropped on some contracts to start the year.
Remember that when you open an annuity, your interest is tax-deferred until you decide to withdraw it. You could take it out each year and then pay taxes or allow it to compound for the length of the annuity, then pay the IRS. This is quite different from a savings account.
Of course, you also must pay a 10% penalty on the interest earnings if you withdraw from your annuity before age 59½. If you are younger than 54½, you may want to wait to purchase an annuity since you won’t be able to draw on that money without penalty.
2. Fixed Indexed Annuities
Are you focused on greater returns for a longer term? Then fixed indexed annuities may be the answer. The interest rate on these changes because it is set based on the growth of a stock index, like the S&P 500. In good years for the market, you’ll record gains. In bad years, you won’t earn anything, though you won’t lose anything, either.
Your gains and losses will even out over the years, but if you’ve had a string of good years, you could earn a healthy return on your investment—probably even more than you’d receive with a fixed-rate annuity.
You may be well-suited to an indexed annuity if you have years more to save and you want to avoid risk. If you need funds right away to live on, this isn’t the right investment for you.
3. Income Annuities
The best guaranteed income may come from income annuities. They don’t pay a predetermined rate of interest, and they have no accumulation value. When you buy one, you pay one sum or series of sums to your insurer, and you pick how long the payments will last. Choosing a lifetime annuity means you’ll get paid every month in perpetuity.
Income annuities include taxable interest and tax-free principal return. One thing investors love? Even after the insurer has given you back everything you put in, you continue to be paid.
Still have questions about the benefits of these options and which might be right for you? Contact Jay to learn more about annuities and their advantages.
