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How To Have A Guaranteed Income- For Life!

Aug 17, 2007
An annuity is a unique financial product, in that it is the only item in the world of personal finance that offers a guarantee.

The values of stocks aren't guaranteed - companies are even legally prohibited from guaranteeing future dividends. Bonds are "fixed income," but they're not really guaranteed - if the issuer goes bankrupt, it stops paying interest and the value of its bonds plummet. That's why for a sure thing in retirement, an annuity isn't just your best bet - it's your only bet.

What is an Annuity?

The literal definition of an annuity is "an annual payment of allowance or income." Although it is possible for an annuity to have the properties of a security, all annuities are guaranteed, to one extent or another, so that makes them insurance products.

In order to sell a traditional annuity, a broker needs an insurance license. In order to sell a variable annuity, a broker needs both an insurance license, and a stockbroker's license.

How Does an Annuity Work?

There are two distinct types of annuities - traditional and variable. A traditional annuity is a purely insurance product. The purchaser of the annuity will begin paying premiums (as with life insurance) for a set period of time.

Then, usually upon retirement, the annuity begins to provide supplemental monthly income to its owner. This income is for a predefined amount and is guaranteed for the duration of its owner's life. Normally, the annuity will also pay a death benefit (again, like life insurance) if its owner dies during a given term.

A variable annuity works differently. The purchaser of a variable annuity still pays premiums, and he or she is still guaranteed an income for life, but as the name would imply, this income is variable.

Each variable annuity guarantees a minimum monthly income - often significantly less than the total amount paid in premiums - but the premiums paid on the annuity are invested by its issuer, with the hope of providing greater returns.

For this reason, variable annuities are considered financial securities - not just insurance products - and thus, anyone who sells them needs a stockbroker's license in addition to a license to sell insurance.

Alternatives to Annuities

The primary appeal of a traditional annuity is that it offers a guaranteed monthly payment of a predefined amount for the rest of your life. The problem is that, due to inflation, this predefined amount might seem like a lot more today than it will be by the time you retire.

Variable annuities are an alternative designed to beat inflation, but studies show that most investors are better off buying traditional life insurance and investing their savings in mutual funds.

There is no doubt that an annuity is the only guarantee in the investment world - but there are alternatives that are nearly as strong, and typically perform better as investments.

United States government securities, for instance, are virtually guaranteed. Since they're backed by the "full faith and credit" of the federal government, the only way they can be defaulted on is if the U.S. government is overthrown. In that case, your annuities probably won't do you much good anyway.

The only real risk you face by buying government securities is inflation, which is also a risk of traditional annuities. But far better than variable annuities, the U.S. government has the ultimate inflation beater - Treasury Inflation Protected Securities.

These bonds have a low interest rate, but the redemption value goes up with inflation. This means you get more in each interest payment as inflation goes up, and when you redeem the bond upon maturity, it cashes out at the inflation adjusted price that you paid for it. If safety is your primary concern, you can't lose.
About the Author
William Smith the author provides additional financial information on many subjects as well as the secret to his success in the market along with 5 Free power stock picks emailed daily so grab your Free subscription on his website at Guaranteed Income (All is Free)
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