What You Should Know Before Buying Annuities

| Total Words: 408

Americans hear a lot about the shaky outlook for Social Security. In the future, the federal program likely will play a smaller overall role in Americans’ retirement plans.

One way to fill in the gaps of a savings portfolio is to put money in annuities. With an annuity, you pay a premium in exchange for guaranteed income payments at regular intervals. It is most often used for retirement purposes.

The basic types of annuities are equity indexed, fixed rate and variable. The major advantage of annuities is that they all guarantee benefits such as tax-free growth, the ability to pass money directly to heirs or charities and an income stream for life.

Over the past few years, equity-indexed annuities have gained a great deal of popularity. They offer interest or benefits that are linked to an external equity reference – a stock index like the S&P 500, for example. But you get a guaranteed minimum return in exchange for a limited maximum return; that is, you get less upside, but also less downside, to your stock-market investing. Your principal is never at risk.

Fixed-rate annuities, on the other hand, guarantee an interest rate and a...

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