As the Stock Market wobbles, it has some thinking about “safe money” investments. The idea of having money saved up for retirement and receiving income during that period didn't start with the establishment of Wall Street. You might be surprised to know that even the ancient Romans had forms of annuities that would pay their citizens later in life. Now of course back then the way they worked was a little different than how they work in their current form, but the overall concept was the same.
How Have Annuities Worked Throughout History?
The kinds of annuities the Romans would have used were payments for their years of military service, and they worked most similarly to today's single premium immediate annuity. This form of compensating individuals for military or other public service would continue on beyond Rome and into the medieval and renaissance periods when many monarchs and barons had wars to pay for. But eventually annuities did come to the American colonies as a way to compensate church leaders first, but then as a way to pay those who joined the continental army during the War of Independence. The first time citizens could purchase annuities like they do today was in 1812, though most annuities up until the mid 20th century were more like pension funds. But annuities became more of what they are today when President Reagan and Congress signed into law the bill that allowed annuities to grow tax deferred. And that's where they are today as one of several options to have tax exempt earnings which you can rely on as annual income during retirement.
What Kind Of Annuity Should You Buy?
As previously mentioned, the single premium immediate annuity has been the one that's been around longest, and it's also the one that pays the most in retirement income. But not everyone may want to put down a huge lump sum of cash for an annuity. For those who can't do that, they may choose to go with a fixed or variable annuity that they pay into over the course of several years and then receive their income once they reach the legal retirement age. And if you don't need to receive the income right away, you might choose to go with a deferred annuity that you can receive income from at a later date and in greater quantities. The main difference between a fixed and variable annuity is that a fixed annuity won't generate very high gains because they're invested in very safe vehicles. Variable annuities on the other hand tend to have a little more involvement from the buyer in what they're invested in and could generate higher future payouts, but there's also a lot more risk involved. There's also indexed annuities which can be anywhere in between the fixed and variable annuities in that they tend to fluctuate a little with market indexes like the S&P 500, but they don't have the same kinds of gains as stocks or other funds in a variable annuity.
Is An Annuity Better Than An IRA?
The answer to this depends on what your specific investing and retirement goals are. If you have a lot of money you want invested right away and don't want to deal with maximum annual contributions to your account, an annuity usually is the better option. You also might prefer it if you're uncomfortable making investment decisions and buying securities, and would rather have someone else do it for you. But if you don't see retirement happening for years, and you would rather be more in control of making investment decisions and taking distributions when the time comes, an IRA may be the better choice for you.