Pros and Cons of Annuities

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With Americans living longer these days, the thought of it is very comforting to the extent of knowing that we will be around a lot longer for our families, friends, and loved ones. With many of us though, the trade off is worrying about the possibility of outliving the savings we built up for our retirement years.

Between healthcare expenses and inflationary cycles of the economy, it can be financially crippling. You may be able to offset this financial quandary by looking in to immediate annuities or SPIA’s – single premium immediate annuities. While most annuities are designed for building retirement value, SPIA’s were specifically developed to provide immediate income once you enter into your retirement years.

As with other annuities, immediate annuities are contracts between your insurance company and you. Additionally, the more conservative investor tends to invest lump sums of money in these so that they can cover their retirement expenses over a long period of time. In return for the lump-sum investment, you are paid a monthly income until you pass away.

The advantages and disadvantages of immediate annuities

Immediate annuities require that the account holder or annuitant deposits a lump-sum payment and in most cases, they start receiving scheduled payments almost immediately after setting up the contract with their insurance company. The annuitant also has the option to receive those payments over their lifetime or a fixed period of time. The following is a list of the advantages and disadvantages of investing in immediate annuities.

The advantages:

Benefit of Exclusion ratio- refers to the non-taxable portion of the annuity and defined as the repayment principal amount

Better returns on investment – immediate annuities provide offer very attractive repayment rates especially during economic times when values are spiraling downwards with other investment instruments

Protection from creditors – even during times of financial hardship, immediate annuities will provide you with an income. Many states offer protection from creditors attaching the account. They are an excellent option should you have to declare bankruptcy.

Regular income stream – probably the primary benefit is the regular income that an immediate annuity provides the investor with. This is especially true for those individuals who do not have the luxury of a regular revenue source.

The disadvantages:

A double-edged sword – realize that if you choose the lifetime payment option, that insurance company is obligated to make those payments for the duration of your lifetime. However, if you should pass away in the first 30 days, that insurance company will take what you have contributed and your heirs will never receive any benefits.

Fair returns on investment – when compared to the returns that you could realize with stocks, these are considerably less. If you are looking for a higher rate of return, this is not an investment to pursue.

Inflationary weaknesses – statistically, the income value of annuities has always been eroded by inflation and immediate annuities are no exception, so you should be cautious if you choose to invest in any of these.

Withdraw From Your 401k Only As Last Resort

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In today’s challenging economy, it’s not unusual for consumers to face sudden financial emergencies. Job losses, injuries or reductions in annual salaries can send even the most responsible of investing individuals into financial crisis mode.

When homeowners face these emergencies, they often take a look at their 401(k) plans and see all those dollars just sitting there. It can be awfully tempting for them; they might consider withdrawing money from their 401(k) plans to help them pay off debt, make a late mortgage payment or, even, pay a large and unexpected tax bill.

The best advice that these individuals can hear? Don’t do it.

Withdrawing money from a 401(k) plan before they turn 59-and-a-half comes with two big, costly penalties. First, the federal government will levy a penalty on individuals equal to 10 percent of whatever they withdrew. Secondly, individuals will have to pay taxes on the money they removed from their 401(k) plans. This all adds up to some significant financial punishment.

That’s why it’s always best for individuals to seek out other options before withdrawing funds early from their 401(k). Homeowners with a significant amount of equity built up in their homes can take out low-interest home equity loans to pay down their debt, for instance. Others might be able to borrow money from family members. That’s never an easy thing to do, but it beats paying the painful penalties that come with withdrawing from a 401(k) plan.

Of course, even if individuals do find some way to allay their financial emergencies without tapping into their 401(k) plans, they still need to take a hard look at their financial health. After all, there’s always a reason why consumers get into serious debt. Sometimes it’s not the fault of consumers: They may have suddenly lost their job. They may have suffered a costly illness that kept them from working. They may have gone through a divorce that was costlier than expected.

Other times, though, consumers run up severe debt because of their own reckless spending. In such cases, it’s important for consumers to seek non-profit credit counseling. Credit counselors can help consumers uncover the reasons behind their massive spending habits. They can also help consumers craft budgets and curtail their spending.

Those consumers who don’t this important step might find themselves staring at a new financial emergency even after they solved an earlier one. And there are only so many times that individuals can tap into their 401(k) funds.

How To Choose An Annuity Provider

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If you have decided to save for retirement, you may have checked out the various possible investments—stocks, bonds, bullion, CDs, and so on. But the annuity stood out to you as a stable source of future income with regular payments, and you decided to go with it as you’re a conservative kind of person.

Now you have a quandary: There are countless insurers out there offering annuity contracts, and you have no idea which one is the best company to deal with.

Don’t worry. Though there may be many insurance companies out there, it shouldn’t be difficult to find the annuity contract that’s right for you based on a few simple guidelines.

Premium Payments

First and above all else, you have to choose an annuity provider that’s realistic for your income bracket. Some companies promise higher interest payments and more favorable terms, but their premiums can be quite large. It would make no sense to render yourself incapable of providing for yourself now by paying massive premiums with the idea that the annuity payments would enable you to provide for yourself later on.

Always make sure that your premium payments are manageable, and take into account the potential requirement for extra expendable cash for emergencies in the future. Leave plenty of breathing room in your budget after you have accounted for your premium.

Reliability

With the financial sector crash of 2008, it’s important to understand all the pros and cons of annuities and that your annuity is provided by a stable company. A fly-by-night company may offer you better terms, but will they be around in 25 years from now? Try to find a stable company that’s been around for years, so that you have the peace of mind of knowing that your annuity payments will be available years from now.

Transparency

Transparency is always important in a company, but it is especially important if you buy equity-indexed annuities or other variable interest rate annuities. Your annuity provider should be clear about what kind of management fees it charges for handling the annuities, what the qualifications are of the annuity fund managers, and what sectors and even what specific companies are being invested in with the annuity funds. Responsible fund management is crucial to getting good returns on your premium payments.

Flexibility

Many annuity providers will only pay to the premium payer and not allow for any beneficiaries to be listed on the contract. If you have a family, you may wish to provide for your loved ones after you have passed on. In this case, flexibility is important, and you should look for an annuity provider which allows you to list your family members as beneficiaries on the annuity contract, and at a reasonable price for this added benefit. If you cannot do this, your annuity payments will cease with your death and your loved ones will not be taken care of.

Hopefully these basic principles are helpful when you decide on the annuity provider that’s right for you. Just remember, many annuity companies are the same, and if you stick to these criteria you will have a good financial foothold on the future.

Buy Stock for Children

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Children receive the same gifts each year, toys, colors, books, candies; name it, they have it. What else can you give your children then? Why not a lesson in financial independence? A lot of people use debit cards for kids as a lesson, but as good as these are, they don’t earn money over time (usually). If children already have their basic necessities then it is better to give them something that they can use sometime down the line.

Why not buy stock for children and give it to them as gifts for their birthdays? You could start with companies that they are aware of, like maybe Toys R Us, or a brand of chocolate that your child loves. If you buy stock for children at an early age, by the time they even fully understand what stocks are, their investment will have grown and hopefully multiplied. Investing in stocks earns more than saving the money in the bank.

You can buy stock for children with online stock traders who sell stocks directly. In addition, this method costs less than having to go through a stock trader. Dividend Reinvestment Plans or DRIPs are also popular options in buying additional shares and investing your earnings.

You may start by giving your children or grandchildren money to buy their first stocks. Then for their birthdays or during Christmas you could buy them some more. Each year, as their earnings increase and as they grow, you could begin explaining to your children or your grandchildren about stocks by showing them how to buy more shares. This way they will have the real life opportunity to learn the value of money and investing which will benefit them greatly in the future.

Another idea is to use pictures and colored markers to explain to the child how the trading system works. Online trading is actually a fun way to introduce this to children because they can easily see the numbers from the screen. Older children are able to distinguish how much earnings they have received from their stocks. You could set up a small game where you put all the companies’ names in a box and ask your children to buy and sell stocks among themselves. Do not forget to teach them the rules like how much stocks are allowed to be purchased at a certain price level. Do not underestimate your children’s ability to learn these financial details. When you make it into a game more children can easily understand all of the rules of buying and selling stocks.

As they grow older, you may give them the freedom to choose stocks for themselves or maybe to rationalize with you when making choices. Of course you have to keep everything simple and easy to understand so that your children will not be overwhelmed. The important thing is to show them the value of investing while having fun as well.

As parents it is important to provide your children with their basic necessities. However, it is also a good idea to help them become independent and savvy about their money. The best gift to achieve this end is to buy stocks for your children.

Should You Invest In Gold?

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As the national economy continues its struggles, gold has suddenly become a trendy investment option. The value of this precious metal has continued to rise even as other investment options have continued to struggle.

This makes investing in gold an easy choice, right?

No, not necessarily.

That’s because gold, for all its glamor, is, at its heart, a high-risk/high-reward investment, not much different than the stock market. While gold may be the perfect investment for some investors, it doesn’t work for everyone.

If you have a low tolerance for risk, gold isn’t for you. If you are retiring soon, gold is not the safest investment. If you’re a young investor, or if you have a long time before hitting retirement, then gold might be a good choice.

Gold prices can rise and fall suddenly. This is exciting when prices rise, but not so much fun when they fall. It also means that you can’t consider gold a guaranteed winner, despite what some of the ads you might hear on late-night television promise.

A smart bet, though, is for investors with a tolerance for risk to include some gold in their portfolios. Some financial experts recommend that investors dedicate 10 percent of their portfolios to this investment.

This makes sound financial sense. The most successful investment portfolios are usually those with a large amount of diversity. Gold can certainly add to this diversity, and offer a bit of protection in case other investments falter during down times.

It’s important, though, for consumers to never fall in love with one investment type. And gold, unfortunately, often has that effect on people. Maybe it’s all the hype surrounding the precious metal, or the long fascination that people have had with this glittery product, but gold simply makes the heart flutter. And it’s never wise to lead with your heart when you’re putting together an investment portfolio.

Instead, treat gold as you would any other type of investment vehicle. Do your research. Analyze your existing portfolio. Examine your own tolerance of risk. You might find that gold does make a solid addition to your investing strategy. Or you might discover that gold, despite all the attention its recently received, isn’t right for you.

The key is to analyze gold with an objective eye and to make the right decision for you. Doing anything else can lead you to a costly mistake.

Should You Work With A Financial Planner?

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You’ve managed to save a nice nest egg for yourself. But you’re getting older, and your retirement years are nearing. This can’t help but make you a bit nervous. Do you have enough money available for retirement? Sure you saved a lot of money over the years cutting coupons out of the Sunday paper and using Medifast coupons, but will you outlive the money in your savings account?

These aren’t easy questions to ask, but they are important ones. They are also ones that you answer more completely if you work with a licensed financial planner.

Financial planners are trained to help you make the most out of your money. Their goals are to help you meet your goals. If you find the right financial planner, you will have gained an important ally in your quest to enjoy a comfortable, stress-free retirement.

The key, though, lies in finding that right financial planner, a professional who is not only skilled but also has a personality that meshes well with your own. After all, it does little good to find a planner who may be a numbers whiz but whom you hate doing business with.

The first step, then, in finding the right financial planner for you is to interview as many as possible. This is tedious and time-consuming. But it’s an important step. Only by sitting down with planners and talking with them will you be able to learn whether they are good fits for you and your financial situation.

Some financial planners are more aggressive, hoping to invest your money in vehicle that promise high rewards for a bit of extra risk. Others are more conservative, preferring instead to grow your money slowly but steadily over a period of time. No one approach is right or wrong. But you will be most comfortable with one of these strategies. Work with the planner who follows the strategy that feels best to you.

Make sure, too, to ask any financial planner with whom you’re considering working for references. Then call these references. Ask them if the planner provided good advice, if the planner worked with clients to reach their goals and if the planner quickly returned phone calls or answered e-mailed questions.

A financial planner can help you decide if you’re financially ready for retirement. If you’re not, this planner can help you get ready. But for this business relationship to truly blossom, you’ll need to work with a planner with whom you have trust and confidence both. It doesn’t hurt to truly like the planner, either.