Nobody likes to lose money. Whether it’s a major stock market correction or a lost dollar in a vending machine, losses are losses – and depending on the situation, they could have a major impact on your life.
With most companies doing away with the defined benefit pension plan, many investors and retirees are turning to annuities as a source of retirement income. But, while these financial vehicles can offer some nice guarantees, will they also keep your principal safe – or can you lose money in an annuity?
Are Annuities Really Safe?
Whether or not you lose money in an annuity can depend on several factors. These include the type of annuity you own, as well as whether you cancel it and/or withdraw more than a certain amount of money from the account in the early years. For instance, fixed and fixed indexed annuities will not incur losses – even in the event of a significant stock market correction. Rather, the insurance company that offers these annuities will typically provide a guaranteed “floor” rate of return. On the other hand, variable annuities have their return tied to one or more underlying investments. In this case, while the opportunity for a high return is there, you could also end up losing money if the tracked investments perform poorly. Most types of annuities will also have surrender penalties if you cancel the annuity during the early years of the contract and/or you withdraw more than a certain amount per year (usually 10% of the contract’s value). This, however, is similar to what would occur if you took money out of – or cancelled – a bond, CD, or mutual fund with a back-end load. So, when purchasing an annuity, the money that you contribute should be considered as a long-term endeavor, and not relied upon for emergencies or other financial obligations. As an added measure of safety, annuities can produce a known, guaranteed stream of income in retirement. With both fixed and fixed indexed annuities, the amount of this “paycheck” is typically a preset dollar figure. This can make budgeting and paying your living expenses much easier – and less stressful – since you know how much you can count on going forward. If the owner or annuitant (income recipient) dies before all contributions have been paid out, many annuities will pay out a death benefit to one or more named beneficiaries. That way, there is no loss of principal.Items to Consider Before Buying an Annuity
If you were considering the purchase of a new vehicle or other “high ticket” item, it is likely that you would do some research and whether or not a particular model will fit your needs – as well as your budget. The same holds true when you are in the process of shopping for an annuity. In this case, some of the key factors to consider include:- Type of annuity (i.e., fixed, fixed indexed, or variable)
- Surrender charge period
- Financial strength of the insurance company
How to Narrow Down the Right Annuity – If Any – For You
There are many different types of annuities – and even within the annuity categories, each may work a bit differently. Because annuities can come with a lot of “fine print,” it can help to walk through your options with a financial specialist who is well-versed in annuities and retirement income. At Annuity Gator, it is our mission to ensure that consumers (and financial professionals) are educated on how annuities work, and whether or not these financial vehicles would be a good fit. So, feel free to contact us with any questions that you may have about annuities. We can be reached by phone at (888) 440-2468 or via email by going to our secure online contact form. We look forward to helping you secure a financially safe and stress-free retirement.
