In today's turbulent financial times, consumers might consider investing in something that will generate a guaranteed source of regular income for their later years.
An annuity - a risk-free but slow-growing investment - may fit the bill.
Mark Boskovich, a financial services agent with AAA Arizona, describes himself as a tortoise in the financial world.
He's a tortoise that achieves results, however. Since Boskovich began providing financial guidance with AAA in April 2011, he has never had a client lose money.
That's not because Boskovich is a financial wunderkind. It's because he advocates slow-growing but guaranteed ways to make money.
That's where annuities come in. An annuity is a financial vehicle that has been around for decades, though many people aren't familiar with the concept. Simply put, an annuity is a contract with an insurance company that can earn money while growing. It's tax deferred, which means you aren't taxed until you withdraw the earnings.
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There are various types of annuities, but all essentially share two traits: accumulation, when your money grows on a tax-deferred basis; and payout, when you begin receiving scheduled payments.
Once payout is elected by the annuity owner, fixed and index-fixed annuities provide a set sum to the investor each year for the rest of her life.
Unlike bank accounts or CDs, annuities are not insured by the FDIC. Both principal and interest earned are backed by the financial strength of the issuing insurance company.
Boskovich works with A-rated companies, including AAA Life Insurance company.
Here are a few facts about annuities:
• Similar to tax-deferred retirement accounts, withdrawals from annuities shouldn't be made until the investor is at least 59 1/2 years old. Investors who withdraw funds earlier could face a 10 percent penalty by the IRS.
• There is no annual contribution limit for an annuity, which allows you to save more with fewer tax consequences. But keep in mind when you start withdrawing money from the annuity, your earnings may be taxed at your ordinary income rate.
• Like with any investment, there may be fees. For example, a rider or add-on, such as an income or long-term care rider that's attached to an annuity, may have fees or reduce the interest an annuity would otherwise provide.
"People get confused about the different types of annuities," Boskovich said. "If you're getting close to retirement or you're in retirement, the steady growth of a fixed annuity or an indexed fixed annuity could be the way to go."
Annuities can be complex and have tax planning implications, so as with anything financial, it's important to work with a trusted financial adviser and tax adviser.
Valerie Vinyard is a public affairs specialist for AAA Arizona. Contact her at 258-0518 or at vvinyard@arizona.aaa.com
