Understand the Difference Between Fixed Annuities and Variable Annuities
The basic premise of investing in an annuity is that it offers the potential for an income stream. However, not all annuities are created equal. There are fixed annuities and variable annuities.
An annuity is a contract with a life insurance company. In essence, you pay the company and, in exchange, you get a stream of payments for a specific amount of time or for life.
With a variable annuity, some of the money you pay the life insurance company is invested in a portfolio of stocks, bonds or other investments, and your income stream depends on the return of those investments.
With a fixed annuity, however, your income stream is guaranteed.
A variable annuity may be appealing if you need significant growth in your portfolio to provide you with income for life, but less appealing when the economy or markets are performing poorly. At those times, a fixed annuity may be a more appealing investment option, as it will provide you with a minimum amount of income every month.
There is no single answer to how to use annuities in your portfolio. Some investors will put no more than a third of their assets in annuities, while others will put three-quarters of their assets in.
It is best to look at how much income you will need and for how long you will need it.
Your financial advisor can help you determine how much of your nest egg to allocate to a fixed annuity to receive the amount of income you will need. You can also contact your Life Insurance Company to discuss a contract for your investment.