The purpose of any investment is to accrue additional wealth over a given period of time. Many of those living on fixed or limited incomes choose to invest in vehicles that can provide a "hedge" against the volatility of the open market. There are several ways to accomplish this. One may choose to invest long-term in managed portfolios which are seen as relatively stable. Alternatively, mutual funds are collective investment pools that aggregate the money of a large number of individuals over a variety of equities and commodities; thus limiting the risk. The intention is the same with an annuity.
An annuity is a type of fund that is generally presented by an insurance company, such as a life insurance company, and is, in essence, a policy put in place against the investor outliving his or her money. It is generally purchased from the insurance company earlier in life and will mature when the individual reaches retirement age. Thus, a purportedly steady stream of income can be provided. The value of these payments will revolve around the initial amount invested, for the owner will receive a percentage of this as a form of interest upon maturation.
To summarize briefly, the various forms of hedging against a volatile market can be:
- Managed portfolios.
- Mutual funds.
Fixed vs. Variable Annuity Rates
There are two main categories of these investment options; fixed and variable. As the name denotes, a fixed annuity will pay a guaranteed percentage of income over time. Due to their rather predictable structure, this is also referred to as a structured settlement. The main benefit of a fixed annuity is that it is considered a safer alternative than investing on the open market. These plans are tax-deferred and above all, these annuity rates are predictable. It is easy to utilize an investment calculator to realize how much the entire package will eventually pay out. However, there may be concerns with a long-term increase in the cost of living or other unforeseen circumstances as a fixed annuity rate will only provide so much income at any given time. It is useful to use an annuity calculator to help you compare the different rates offered by various annuity providers.
So, some of the advantages of a fixed annuity rate are:
- Predictable growth
- Tax deferrals
A notable drawback is:
- The rate does not change over time; potentially leading to financial difficulties should additional income be needed.
Another option is to choose a plan that will involve variable profit. This is accomplished through managed investing in a select amount of open market equities. The potential benefit is that the owner may come into a great deal of profit should these equities grow in value. While these are also tax-deferred and offer the possibility for higher growth, these packages are more exposed to the open market. Therefore, there is a higher chance that the investment may decrease in value over its life should the economy worsen.
So, some of the benefits of the variable options are:
- A higher chance for growth.
- Tax-deferred, as with the fixed plans.
One major pitfall can be:
- An increased volatility and the potential to lose funds.