My sister is an avid cyclist. It’s actually his favorite way to exercise. As an older brother, however, I am concerned for his safety. Generally, cycling is incredibly safe. Plus, she takes the proper precautions, like wearing the right gear and being in the right position on the road.
Despite this, she had a serious accident where she accidentally hit a pothole. As a result, she rolled over and fractured her wrist. The moral of the story? Despite all our efforts, the risk always remains in the shadows.
And that’s certainly true when it comes to investing your hard-earned cash in annuities.
Generally speaking, annuities are one of your safest investment options. But, they are not 100% risk free. The good news? You can use the following three ways to invest without risking money with an annuity.
1. Work with the right supplier.
“Annuities are not backed by institutions like the FDIC,” explains John Rampton, founder and CEO of Due. “They are also meant to last a lifetime.” That’s why you should only work with an insurance company that looks after your long-term interests.
How to finance such a company? The first thing you can look for is a high rating from a third party such as AM Best, Moody’s, Standard & Poor’s (S&P) and/or Fitch.
Here are some other considerations suggested by Rampton;
- How easy it is to sign up, fund and access your balance.
- The level of customer service and what you expect in terms of payments.
- Repayment interest rate.
However, since your time is valuable, we have compiled a list of best annuity companies available. Each of them meets the above criteria. “And we’ve even divided the list into best fixed, fixed indexed growth, MYGA, variable and indexed annuities so you can quickly find the type of annuity that’s right for you,” he adds.
In addition to working with the right annuity company, you also need to choose your vendor wisely.
“Since your broker needs to put food on the table, they will earn a commission on annuity sales,” Rampton says. Sometimes these costs are not disclosed. Ask them how much they will earn on the sale. “And, more importantly, that they don’t sell the wrong annuity just to earn a commission.”
Not sure this is a problem? A study revealed that one out of twelve financial advisors was penalized for serious misconduct.
“These things aren’t frivolous,” says Mark Egan, assistant professor of finance at Harvard Business School and co-author of the study. “The average settlement is over $100,000 and the median is $40,000. These are costly offences.
If you decide to purchase an annuity, you need to do your due diligence and be as thoughtful as you would any other major life decision. After all, although annuities are not as risky as other investments, such as stocks and bonds, there are still inherent risks.
Is it possible to completely avoid these risks? Not always. However, you can significantly reduce financial risk by diversifying your pension.
By balancing annuities with stocks, bonds and cash, you create a well-balanced portfolio. Your money is then protected from market volatility, inflation, taxes and even medical expenses. Additionally, a combination of variable and fixed annuities can generate additional income in retirement.
How to diversify the annuity.
More specifically, however, here’s how you can diversify your pension;
- Society. Let’s say you have $500,000 to invest in annuities. Ideally, you should split your money between two or three companies. This will reduce your risk for each particular company in case one goes bankrupt.
- Type of annuity. You can also diversify the different types of annuities so that your eggs are not all in one basket. Short-term MYGAs can be combined with longer-term indexed annuities, for example.
- Credit method. The allocation of credits allows you to diversify your investments in index annuities. An indexed annuity that performs well in market conditions can be found with this method. In addition, you will be able to average your yield by distributing it evenly.
- Index. You can also diversify your investments with index annuities.
- The month of purchase. You don’t want all of your indexed annuities to mature at the same time when it comes to indexed annuities. One way to do this is to buy more than once a year. So your winnings will be locked at different times.
- Guarantees. You can hold both secured and unsecured options simultaneously. In addition, you can hold both a fixed annuity and an indexed annuity.
Additionally, to determine whether to include or exclude an annuity from your portfolio, consider how the current interest rate environment will affect your retirement income.
Above all, don’t panic. Your long-term financial plan and the diversification strategy you’ve developed should weather any storm well. As such, don’t let external factors, such as clickbait headlines or short-term market volatility, confuse you.
3. Build an annuity ladder.
“Many investors are familiar with bond ladders or CD ladders, and might already have these types of strategies in their retirement plan,” writes Stan Haithcock, aka Stan the Annuity Man. “Annuity contract laddering is a new concept to most people, but you should definitely be aware of these unique strategies for lifetime income and principal protection.”
Scale for performance.
“Bond and CD (certificate of deposit) ladders attempt to achieve a higher overall return by staggering maturities so that you have money maturing at different time intervals,” Stan notes. “The hope is that when a specific tranche of money matures, you can lock that money in at a higher rate for another specific period of years.”
MYGAs (Multi-Year Guarantee Annuities) are the equivalent of CDs in the annuity industry, he adds. You decide how long you want the interest rate to be locked in. “Both have no annual fees or moving parts, and the interest rate is contractually guaranteed.”
MYGAs are often referred to as “multi-year guaranteed annuities” or “fixed rate annuities”. They are also very similar to bonds, where you withdraw the interest without touching the principal.
- Fixed rate scale. “The most popular annuity laddering strategy for yield is what I call a ‘fixed rate ladder’.” MYGA. In year 3, you would have money maturing each year to increase the interest rate.
- Mixed fixed scale. A “mixed fixed scale” is a method of laddering annuities using MYGAs and fixed indexed annuities (aka: fixed indexed annuities, FIA or indexed annuities). This is the same strategy as the “Fixed Rate Ladder” mentioned above. “For example, with a total of $400,000, you would invest $100,000 in a 3-year MYGA, a 5-year MYGA, a 7-year FIA, and a 10-year FIA,” he clarifies. “MYGA yield is contractual, and the hope is that FIA yields will be a bit higher than comparative duration CDs.”
Laddering for lifetime income.
By now you should know that annuities can be laddered based on performance and income. “Annuities are the only financial product on the planet that can guarantee a lifetime stream of income, no matter how long you live,” he says. “It’s a transfer of risk strategy and financial monopoly that only annuities have.”
When you begin to receive payments, your “income annuity” is largely determined by your life expectancy at that time, with interest rates playing a secondary role. Known as life annuities, income annuities provide a fixed income for life and can provide needed cash and guaranteed income. And, it can also be combined with other sources of retirement like social security and pension.
“There’s no ‘best income annuity laddering strategy’ out there, so let’s look at 3 of the most popular currently in use,” adds Stan.
Scale the purchase.
When you’re nearing retirement or don’t want to commit to a large lump sum, it makes sense to buy annuities over time. For example, if you wanted to invest $300,000 in a Single Premium Immediate Annuity (SPIA), you could buy a $100,000 SPIA every year for three years.
Scale the date of the state.
It is also possible to stagger the start date of the income. “For example, taking this same $300,000 example to put into a SPIA, you could buy 3 separate $100,000 annuities at the same time with different income start dates,” he says. “The first $100,000 SPIA would have income within 30 days of the policy issue date.” With the second $100,000 SPIA, income would begin in one year, and with the $100,000 DIA (deferred income annuity) income would begin in two years.
As the name suggests, “it’s a combination of purchase date staggering and start date staggering.” For example, if you purchased an annuity for $300,000, you will start receiving income after one year. An additional $100,000 annuity will be purchased one year later, with income commencing in three years. In the third year of the annuity, $100,000 is purchased with income beginning in five years.
“Ultimately, the laddering of income annuities is customizable based on your specific situation and goals,” says Stan. “And because annuities are contractual guarantees, it’s all math.” Ultimately, the goal is to build the ladder to your specific needs, which will also reduce financial risk.
The post office 3 ways to invest without risking money with an annuity appeared first on From.