Whether you have already retired or you are approaching that magical day, you certainly realize the low-interest rate environment we are in.  With money markets  yielding a miniscule .3% to .5%, how are you supposed to create a fixed income that pays your bills without taking on too much risk?

In 2008 we were reminded of the risks of a traditional portfolio of stocks and bonds.  If you had $1,000,000 allocated in even the most conservative corporate bonds and blue chip stocks, your account was still down 25%-35% or more.   While this type of event may not happen again for years, we can not assume it will not.  Furthermore, we must manage against this type of risk.  One of the ways to accomplish this is through the use of an  annuity.

By pooling your risks with other annuity  investors, annuity companies are able to guarantee a fixed income that is significantly higher than traditional CD’s and money markets.  For example a 5 year fixed annuity in the state of Florida currently yields as much as 4%.  Annuities also carry state guarantees protecting you from default, similar to how the FDIC works for bank’s CD’s.

One of the things to remember about annuities is that they have surrender charges and are not liquid during the vesting period.  Be sure that you do not need that money during the time it is invested or you will pay a penalty called a surrender charge. So, you’ll still need to set aside money for emergencies.

Lastly remember that annuities should be viewed as long term and “safe investments”  that create retirement income. Therefore, always consider the rating of the issuing annuity company.  Anything below “A” should be avoided for the most part, because unlike bonds most riskier (lower rated companies) annuities do not reward you with a higher return.

Annuities can and should be considered as a primary tool when looking at how to develop a solid long-term income portfolio.  By no means are the the “end all be all” however, they can certainly play an important role in creating that coveted retirement income for life.

Related posts:

1. How to Guarantee Your Lifetime Income – Retirement Income
2. Fixed Annuities
3. The Basics of Annuities
4. Average Index Annuity Beats CDs By 70% over Five Year Period
5. Fixed Income Funds