Annuities: The One Thing They Lack For Retirement Investments

Annuities offer a number of advantages when you're investing for retirement. However, they lack one critical component as an investment vehicle.

Before we talk about this missing ingredient, let's make sure you're clear on what they are. As a basic definition, these investment products are the exact opposite of life insurance in that they serve as a means for liquidating money out of your estate while a life insurance policy seeks to create and fund an estate.

They provide you with a stream of income for a guaranteed period of time. You can pay for them in one lump sum premium or with periodic premiums. And, when they pay out, you can elect to receive your payments once a month, every 3 months etc.

Your investment advisor will generally speak to you about four types of annuities:

Within the above-mentioned types, you'll find that they all fall within 2 major categories fixed and variable. Your risk tolerance will dictate which of the two you will buy. However, many seem to chose the variable over the fixed because of the eroding effect of inflation on your purchasing power with a fixed benefit.

A third category seems to be gaining popularity because it bridges the gap between the fixed (subject to inflation risk) and the variable (subject to market risk). It is the equity indexed (EIA).

However, the one that may be of particular interest to you in your retirement planning is called the retirement income annuity.

The most unique feature of this plan is a death protection it provides. Should the insured die before retirement, there is a term insurance benefit that is also paid to the beneficiary.

All in all, these investment products are worthy of your consideration for several reasons:

However, they fall short in one critical area. Similar to your traditional qualified plans (IRA, 401(k) etc.. they grow tax-deferred. But when you start withdrawing funds, you are subject to taxes.

In case you're thinking to yourself what the big deal is, the answer is you may not be in as low a tax bracket as you may think after retirement. And this could mean unnecessary tax liabilities. You have a duty as do I to investigate all avenues that reduce your tax liability.

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