The best way to plan a robust financial future is to do so in advance, and investing is one of the best ways to get the job done. Annuity contracts are an excellent way to prep for your best future. Whether you’re familiar with this type of investment, or are just beginning to think about your future savings, we’re here to help.
Benzinga has done extensive research on the best annuity contracts available on the market to take you from a basic understanding of this investment to selecting the best one for you.
Overview: What Are Annuities?
Retirement books point to annuities as one of the best ways to invest in your future. Annuities are a financial product in which you make frequent payments and in turn, you receive future cash flows in the form of regular income in later years.
The most common function of annuities is to for retirement investing. Two examples of annuities include pension funds used by some employers and Social Security.
You have three options to finance your annuity agreement:
- Make a bigger payment up front.
- Deposit regular payments.
- Do both.
In exchange, the financial institution agrees to make regular payments to you in the future. These payments can continue until a preliminary arranged date comes or in some instances, until death occurs.
The financial institution invests the money of your deposit in different funds, and the funds grow over time. In the end, you get more money out of the annuity than what you paid into it.
An annuity contract will specify:
- The amount you will invest
- How you plan to finance this amount, whether it’s all at once or with regular payments
- When you start receiving your payments
- At what frequency you will receive your payments
- What the amount of the payments will be
- How long you will receive these payments
Types of Annuity Contracts
Depending on what type of income you pursue and how much risk you are willing to take, there are many types of annuities:
- Fixed annuities: Fixed annuity contracts have guaranteed rates. They are easy to understand but pay less.
- Variable annuities : Variable annuities put your money in a mutual fund of your choice. The interest rate varies depending on market performance.
- Fixed-indexed annuities: This is a fixed annuity contract but with an extra variable rate. The additional variable rate comes from investments in index funds.
- Immediate annuities: Immediate annuities are the exact opposite of life insurance. You pay a lump sum now in exchange for regular payments until death. The annuity is “immediate” because it usually starts the payment process within 12 months.
- Deferred annuities: Deferred annuities are opposite of immediate annuities. You pay the upfront amount and the financial institution starts making payments after a certain period of time.
What Makes a Good Annuity?
As with every product on the market, there are good and bad annuity contracts. There are some criteria, which a good annuity needs to meet.
Stability of the Financial Institution
Good annuities come from reputable financial institutions with history and a big record of satisfied customers.
Annuity contracts are a long-term investment. In many cases, the payouts can begin after 30 years and continue for 20 more. This makes a total of 50 years. You will need to be sure that the financial institution is stable and reputable as it needs to “survive” for at least 50 years to pay you back.
If the company goes out of business, you obviously won’t receive payouts. In the case of failure to meet financial obligations, there may be some guaranteed payments, but try to avoid companies that might go out of business after 10 years. “Guarantees” exist only during the company’s lifetime, so you’ll need to get familiar with the terms and conditions, as well as whether the company gives guarantees.
Annuities involve amounts of money that are large enough to support a single person for a specific period of time. Since amounts are hefty and the contract involves a lot of operations, fees can also be hefty, too.
Here are some of the most common fees paid by people who invest in annuities:
- Insurance charges
- Investment management fees
- Surrender charges
- Rider fee
- Flat contract fee
A good annuity will transparent by announcing and underlining its charges. Some companies announce their fees and then tax you even more for investing operations. This leads to a bad experience and less income for you.
The best annuity providers will give you many options to do the payment for your contract:
- Pay the whole sum up front.
- Pay via regular deposits for a fixed period of time.
- Pay part of the sum up front and via regular deposits for a fixed period of time.
Then you can choose the annuity contract that fits your financial circumstances in a better way. An example of using both alternatives is:
Pay $15,000 now and you keep paying $100 per month for a period of 20 years.
The best financial institutions let you plan your withdrawals, similar to payment alternatives. You can:
- Receive the whole sum at once.
- Receive regular cash flows for a fixed period of time.
- Receive part of the sum and regular cash flows for a fixed period of time.
If you choose not to get the whole amount, whatever stays in the account will keep accumulating interest. In other words, the less you take out of the account, the more the account continues to grow.
Annuity 1: Fidelity Personal Retirement Annuity
This is a variable annuity contract by Fidelity, one of the biggest companies for retail investment in the world. The personal retirement annuity requires a minimum investment of $10,000, and you have array of choices (more than 55 funds).
- Tax-deferred growth potential
- Low fees
- Many investment funds
- No surrender charge
- Earnings before withdrawals are not taxed
- Flexible withdrawal plans
Depending on the amount of risk you take on, the average yearly interest varies from 0.22% to 13.21. The expense ratios are among the lowest, from 0.1% to 1.09%.
Low Fee Transparency
- *Annual annuity charge for investments below $1 million: 0.25%
- Underlying investment costs
*Contracts with initial investment above $1 million or accumulated amounts above $1 million subject only to 0.1% annual charge.
This annuity gives you the option to distribute your earnings on periodic future cash flows, or to do a lump-sum withdrawal.
Annuity 2: AIG Polaris Select Investor Variable Annuity
AIG is one of the biggest insurance companies with millions of clients all over the world. Its Polaris Select Investor Variable Annuity gives you a rich choice of investment options; it has around 100 investment options and more than 20 asset classes. The minimum investment of the annuity contract is $25,000.
- Rich on investment options and asset classes
- Tax-deferred accumulation
- Experienced money managers
Your interest and expense ratio will vary depending on the content of your portfolio.
- Annualized fee – 1.1%
- *Contract maintenance fee – $50
- Underlying investment costs
- Optional benefits fees
*Applies for contracts under $75,000
Extra fees may apply if you choose some extra benefits for your annuity contract.
Withdrawals happen for free when the withdrawal period comes. You can choose between monthly, quarterly, semi-annual, or annual payments.
Annuity 3: Schwab Retirement Income Variable Annuity
Charles Schwab is a big investment company, with a strong reputation and years of experience. The Schwab Retirement Income is another variable annuity, which wins out on low cost. This annuity contract offers three diversified portfolios you can choose from. The minimum initial contribution is $50,000, which is the highest of the three choices we suggest.
- Optional guaranteed lifetime withdrawals
- Two optional death benefits
- No surrender fees
This annuity contract offers three diversified portfolios you can choose from:
- Balanced: Average yearly growth of 4.72% and lower risk exposure
- Balanced with growth: Average yearly growth of 6.53% and a moderate risk exposure
- Growth: Average yearly growth of 8.45% and higher risk exposure
- Base annuity fee: 0.6%
- Underlying investment cost: Between 0.6% and 0.66%
- Guaranteed lifetime withdrawal benefit (optional): 0.8%
- Return of purchase payments death benefit (optional): 0.2%
- Stepped-up death benefit (optional): 0.4%
Payouts happen on a regular basis or via a lump-sum withdrawal when the withdrawal period comes. If you activate the guaranteed lifetime withdrawal benefit you can secure a lifetime income.
We approached three variable annuity contracts from three different providers for options of the best way to invest for your future. We chose the variable annuities because they are more diversified and there are more components that we can compare. Also, variable annuities offer higher returns than fixed annuities but they tend to be riskier as market conditions apply.
Each of the three companies, Fidelity, AIG, and Schwab offer other types of annuity contracts as well. Since the companies are among the top players in the industry, their other annuities are also reliable.