Choosing the Right Kind of Annuity

One of the best ways to save and invest in tax deferred earnings and have them paid back to you over time is by purchasing an annuity. If annuity is the way you want to go, there are a few tips that will help you narrow down your search of which type of annuity is best for you. First and foremost, determine your personal tolerance for financial risk taking. Some people have a high tolerance, while others may have a low one. Know what your long term investment objective is. It is aggressive, moderate or conservative?

If you know you have a low risk tolerance level, a fixed annuity may work best for you. Your objective is conservative, and you want the most guarantees available. For someone with a moderate risk level, an equity indexed annuity will better suit your needs. With equity indexed annuities, you would like to peg account growth to market indexes. However, if you have a high risk tolerance, a variable annuity is best. Your investment objective is moderate to aggressive. You are willing to forgo some guarantees for higher potential account growth.

So where do you purchase annuities from? They can be purchased from insurance agents, investment representatives at many banks, and even brokers at securities firms. The rates of a return on fixed annuities are often times comparable to those of many certificates of deposits. But unlike certificates of deposits, growth is tax deferred. There is not a maximum contribution to annuities as long as they’re held outside of a retirement account such as a 403b. Most annuities that you may choose from are “no load”. This means that all of your deposits go to work for your right away. Avoid putting your money in an annuity if you know you will need the funds in the upcoming years. There will be deferred sales charges that will be imposed if you cash out too soon. Until you read the prospectus, avoid buying any annuity with mutual funds. Keep in mind too that tax deferred growth may potentially cost you more than you actually save in taxes. Therefore, before you buy, take the time and effort to run the numbers.

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