Should You Invest In Annuities?
Annuities are an interesting investment option, especially now a days when the market is all over the place. Unlike stocks that move up and down seemingly on a whim, fixed annuities provide a guaranteed rate of return either for a set period of time or for the life of the annuity contract. This is obviously one of the major benefits for investors who are more concerned with receiving a rate of return that they can plan on rather than one they simply just hope for.
Perhaps the most important benefit from a financial planning aspect is that annuities grow tax deferred over time.
Essentially you are not taxed on your income until you begin receiving payments or withdrawing your investment. Usually if you begin payments at your retirement age then you will be taxed at a lower rate than you would have during your working years so this, combined with the time value of money, provides a higher than usual return. On the flip side though annuities are not taxed as capital gains as most investments are, but they are instead taxed as regular income.
Another benefit of annuities is that the payments an annuity provides usually last as long as you continue to live, even if that amount extends beyond the amount of money you invested initially. The payments you receive over time is based on a number of factors including the amount of money you invest, the amount of interest that the annuity pays, and also your expected lifespan. If you outlive your expected lifespan the annuity provider will continue sending you payments every month in the same amount regardless if you have already received more than you initially invested. A great benefit isn’t it? Of course on the flip side of that is that if you die earlier than expected then you may not receive the full amount you invested.
One of the drawbacks to annuities is that the fees that some annuity providers charge can be rather high and will eat away at your rate of return. One of these fees is known as a surrender charge and is applied should you withdraw your money earlier than expected. Other fees include maintenance charges, and investment charges so it is important to understand what you are investing in before you sign the contract.
So are annuities right for you? Well only your financial planner can answer that question but they are a good option for many investors.
How to Open Your First Roth IRA
If you’ve undertaken the necessary analysis and have determined that you are qualified for a Roth IRA, and that it is the best retirement vehicle for you, then the next step is to decide where you want to open the account. Part of that decision, however, will involve what sort of investments you’re willing to make, as all providers don’t offer a full spectrum of investment possibilities. If you want to accept more risk, in hopes of greater gains, you will probably find fewer providers able to accommodate you. More conservative investments, however, are widely available. You can open your Roth IRA very easily at a number of banks, mutual fund companies, brokerage firms or insurance companies. Just be certain to ask about all fees and services, as these can vary greatly from one provider to another. All you’ll need is your checkbook and social security number, and you’re on your way to providing for your retirement.
Administration methods of Roth IRAs is fairly uniform, from one provider to another, although charges may vary greatly. Some providers, for example, may waive transaction charges, in the event of early withdrawals, or have no annual administration fee. It’s advisable to sit down with two or three different providers, and carefully compare all aspects of their service and their investment history, before committing.
If you already have an IRA, you may be able to transfer that over to the Roth. However, it’s important to recognize the differences between a Roth and other IRAs. Most IRAs will allow deductions for the contributions you make to the fund, but once you start receiving distribution of the funds, they are taxable. With a ROTH IRA, no deductions are allowed, so you will pay standard income tax on the monies you contribute now. However, once you start receiving distributions, that money is not taxable as income. This is a very important consideration in structuring your IRA, depending upon what your tax bracket is now, and what you expect it to be later.
Selecting the types of investments for your portfolio is dependent on a number of factors.
1. The size of your Roth IRA
2. The time-frame of your investment
3. What other investments you already have
4. Your investing style
Tax law doesn’t set a minimum size for a Roth IRA, but the provider can. If your Roth is a small one, don’t try to get too fancy… just select a simply investment that won’t involve a lot of fees or manipulation. There’s time to get fancy once your fund is larger.
Diversifying Your Retirement Portfolio For the Best Yield
"Diversify" is a term we’ve all heard about investment portfolios, but it’s important to understand exactly what it means to our portfolio, in order to do it properly.
While it can mean different things for different investment portfolios, here, we’ll be specifically talking about retirement portfolios. The goal of that type of portfolio is to provide a reliable, steady (and hopefully, growing) stream of income. Therefore, it’s important to build a network of investments that will compensate for the ups and downs of the others. So what do we do first?
Determine your spending rate. This refers to your living expenses… the amount of cash you need to take out of the portfolio each year, adjusted for inflation.
If, for instance, you have a portfolio with a total market value (TMV) of $500,000, and a $50,000 spending rate, you will need to build an investment plan that will give you a ten percent net yield, which is an ambitious package.
However, if your TMV is $1,000,000, then you could maintain the same spending rate with a five percent net yield. That means you would not have to undertake investments of such a high risk level. As you can see, the larger the TMV, the more flexibility you will have.
Next, examine the risk profiles of different investments. In order to achieve an adequate spending rate, for instance, many retirees opt to carry around half their portfolio in equities. These carry a better yield, but their downside is a higher risk factor. The remainder of their portfolio will be spread amongst lower risk and lower yield investments, of a diverse nature.
This second half of the portfolio will typically be broken up into much smaller individual investments, spread across various investment classes and markets. The idea is to structure your investments such that when any one investment falls in value, at least one other will rise an equal amount, compensating for it. The equity portion of your portfolio is making the most money, while the remainder is providing stability.
Diversification, however, does not offer complete protection against a market downturn. It simply mitigates the effect, which effectively gives you more time to take corrective action. Your broker can help you select a good cross section of investments, in the value or growth, small, mid or large classes, in order to ensure a positive growth of your portfolio, often even in a bear market.