What You Need to Know

There are several avenues investors can take when pursuing long-term opportunities that can provide steady income over time.

Annuities are a common vehicle for retirees seeking to manage their income since they can provide periodic payments and tax-deferred growth. In this article we’ll take a look at the potential benefits of purchasing annuities and how they can complement a real estate portfolio through diversification. 

What Are Annuities

Annuities are long-term insurance contracts issued by insurance companies. They often prove attractive to retirees because they can help prevent seniors from outliving the income they’ve accumulated throughout their lives. They also can be beneficial if you’ve maxed out contributions to other common retirement tax-favored investment vehicles, such as 401(k)s. Purchasers receive periodic payments from their contributions and also have the potential for tax-deferred growth on their contributions.

There are three main types of annuities:

  • Variable. This type of annuity allows you to direct how your contributions are invested, although investments are usually limited to sub accounts, which are essentially clones of specific mutual funds with some key distinctions. The investment options in sub-accounts are predetermined between insurers and select mutual fund companies. Insurers typically offer a handful of different funds from which to choose, and they can provide purchasers with comprehensive information on all sub-accounts inside their contracts. Payouts on variable annuities are determined by your contributions, contractual rate of return, and fees/expenses associated with the annuity.
  • Fixed-rate. Distributions and interest rates are locked in, which can be good and bad. On the one hand you’ll receive regular, stable payments, but on the other hand return rates are capped at a fixed rate that often underperforms when compared to other avenues of tax-deferred investments.
  • Indexed. This type of annuity provides purchasers with in interest credit that is based on the performance of a selected stock index.

Fixed-rate and indexed annuities are both regulated by your state insurance commissioner’s office. Variable-rate annuities, meanwhile, are regulated by the SEC. Annuities can carry a range of different fees and charges, including administrative fees, mutual fund investment expenses, mortality and expense risk charges, and early withdrawal “surrender” charges. These fees can dilute the overall return on your annuity.

How Annuities Can Complement Your Portfolio

A diversified investment portfolio can be crafted in a number of ways depending on your investment philosophies and appetite for risk. Traditional portfolio diversification includes a balanced mix of stock, bonds, and mutual funds. More recently, however, investors also are adding alternative assets that are uncorrelated with public stock market performance for broader portfolio diversification.

Annuities can be used to complement any type of portfolio, whether it’s a traditional mix of publicly traded stocks, bonds, and mutual funds or a more diversified portfolio of real estate, cryptocurrencies, crowdfunding, peer-to-peer lending, and other types of alternative assets. Annuities can provide returns that can be used to meet or supplement your capital requirements, and they aren’t subject to cyclical declines in real estate values. They can complement revenue from rental properties, REIT dividends, or any other type of income derived from your real property holdings.

The Bottom Line

Portfolio diversification requires a disciplined approach to investing that spreads capital across a wide range of investments in an effort to manage risk. Annuities are one avenue to consider when crafting a diversified portfolio. Consult with trusted financial professionals to determine which type of annuity and options might meet your needs. After weighing the pros and cons, real property investors might find that certain annuities can complement their investment portfolios.

 

This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor.
Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation.
All investments have an inherent level of risk. The value of your investment will fluctuate with the value of the underlying investments. You could receive back less than you initially invested and there is no guarantee that you will receive any income.
Diversification does not guarantee a profit or protect against a loss in a declining market. It is a method used to help manage investment risk.
A fixed annuity is intended for retirement or other long-term needs. It is intended for a person who has sufficient cash or other liquid assets for living expenses and other unexpected emergencies, such as medical expenses. A fixed annuity is not a registered security or stock market investment and does not directly participate in any stock or equity investments or index.
There is a surrender charge imposed generally during the first 5 to 7 years that you own the contract. Withdrawals prior to age 59-1/2 may result in a 10% IRS tax penalty, in addition to any ordinary income tax. The guarantee of the annuity is backed by the financial strength of the underlying insurance company.

INDEXED ANNUITY (EIA/FIA)
Indexed annuities are insurance contracts that, depending on the contract, may offer a guaranteed annual interest rate and some participation growth, if any, of a stock market index. Such contracts have substantial variation in terms, costs of guarantees and features and may cap participation or returns in significant ways. Any guarantees offered are backed by the financial strength of the insurance company, not an outside entity. Investors are cautioned to carefully review an indexed annuity for its features, costs, risks, and how the variables are calculated.
VARIABLE ANNUITY
Please consider the investment objectives, risks, charges, and expenses carefully before investing in Variable Annuities. The prospectus, which contains this and other information about the variable annuity contract and the underlying investment options, can be obtained from the insurance company or your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.
The investment return and principal value of the variable annuity investment options are not guaranteed. Variable annuity sub-accounts fluctuate with changes in market conditions. The principal may be worth more or less than the original amount invested when the annuity is surrendered.

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