Every investment involves some level of risk and annuities are no different. An annuity is an insurance contract used to provide a source of income during your retirement. Depending on how your contract is structured, you might fund it with a one-time lump sum or with scheduled contributions over time.
Fixed versus Variable
If you are concerned about risk when deciding whether an annuity is the right investment vehicle for you, a fixed annuity can be designed in such a way that risk is minimized by sticking with conservative, fixed interest rate returns. Going with a variable annuity where your contributions are invested in bond or equity markets increases the risk that your portfolio will suffer losses. Remember, when it comes to investing the higher the return, the greater the risk.
Consider the risks associated with the following types of annuities:
- Stock Fund Annuities. These annuities might be invested on stock mutual funds that are professionally managed. As a variable annuity, these funds can generate large gains or losses depending on market performance.
- Fixed Income Annuities. A fixed income annuity insulates the investor from market volatility. This annuity has a guaranteed interest rate and is designed to grow predictably. The risk that exists with this type of annuity is that there is always the possibility that it will not keep pace with inflation.
The Risk of Insolvency
Since annuities aren’t FDIC-insured, if the insurance company that has issued the annuity becomes insolvent, there is a possibility of loss. States usually provide funds to prevent annuity losses. However, if the amount invested in an annuity exceeds the state’s coverage amount a loss could occur if the insurer goes bankrupt.
The bottom line? You don’t want to risk your retirement savings, and you do want a reliable, steady source of retirement income. Contact us for a consultation, where we can weigh the potential risks and returns of various options and come up with a solution tailored to your retirement goals.