Income For LifeFrom an early age, we are taught to work hard, save money, and deposit it in a savings bank. Savings go towards buying a house, education, or for a our retirement.
We are also taught to scrimp and save and make savings deposits faithfully every month. When our savings reaches a threshold, say $5,000 or $10,000, we may then consider converting that amount to a CD for a higher rate of return than our savings account. While it will earn you more money in a CD, you do have other vehicles that can earn you more than 3% and may also be tax deferred.
Annuities are a viable alternative to traditional CDs or money market savings accounts. When you purchase an annuity you are buying a contract from an insurance company. The terms of the contract provide you a specified rate of return and your gains are tax deferred. The federal government ensures your money is safe by making the insurance company have cash reserves on hand to cover the annuity. Some states also have implemented funds to guarantee the safety of your money.
All annuities offer returns based upon your premiums paid. But annuities come in many shapes and sizes. There are immediate annuities which offer immediate income payments. There are also deferred annuities which still earn returns, but in which you do not collect income payments until a future date. You may pay a one time premium for these or make yearly contributions, which is also known as a flexible premium annuity.
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The most common annuity is a fixed deferred annuity and quite popular for funding college tuition or retirement income. This is because these annuities guarantee a specified rate of return for a specified time frame. This rate of return is usually better than any bank CD or money market savings account can offer. This product is more conservative than a fixed index annuity, which can garner higher rates of return.
While a fixed index annuity guarantees a rate of return on your principal balance, the actual rate can vary. Annuity funds are invested usually in a bond portfolio, and returns are based upon the performance of another stock market index such as the S&P 500 or the Dow Jones Industrial Average. Thus, if the stock market performs well, you share some of the gains. If the stock market does not perform well, you do not incur any losses. It’s really a win-win scenario for you, as you can experience some of the rewards without any risk to your money.
When you take into account a higher rate of return on your money, a risk free guarantee on your money, tax deferment and bonuses, you may well earn more on a fixed index annuity in a fraction of the time it would take you to earn it through an account with your savings bank.
