Annuities can prove to be one of the most reliable and lucrative means of establishing financial security during retirement years. However, it is crucial to choose the right annuity, with the right insurer in order to ensure financial stability, especially when navigating the ups and downs of a potentially tumultuous economy. Once an annuity is chosen, there really is no going back and making any major changes. So, it is important to make the right choice the first time.
Level Annuity vs. Escalating Annuity
One of the most basic choices available when choosing an annuity is whether or not to opt for annual increases in the income received. If a level annuity is chosen, it means that a fixed monthly income is given out for the rest of the annuity owner’s life. This means that during times of inflation, the value of the annuity can actually get smaller. It decreases in value at the same rate that inflation escalates. If a level annuity is chosen, the annuity owner is basically asserting that inflation will not have a major impact on the value of the annuity. However, this can be a rather monumental gamble.
Instead of a level annuity, an escalating annuity can be chosen. The income that is generated from an escalating annuity increases by a fixed amount each year. This amount can be something like 3 or 5 percent. The use of an escalating annuity can then mean that the income of the owner can rise more or less quickly than inflation.
Cost of an Escalating Annuity
The cost of an escalating annuity can be rather significant. When choosing an annuity that increases income each year, the owner must start with an income that is much lower than that of a level annuity. It can take several years for the income of an escalating annuity to catch up with that of a level annuity. This essentially means that the longer the owner lives, the more benefits they are likely to reap from the use of an escalating annuity and the more valuable each annual increase becomes.
Choosing the Right Annuity
Choosing any investment can be an incredibly important decision, especially when choosing what sources of income will help sustain quality of life during retirement years. There is no blanket choice for any annuity owner. However, there are some relatively easy to follow rules when choosing the right annuity. An escalating annuity seems to work best for those individuals who will be using the investment as their main income source during retirement. This helps to ensure that it will never be swallowed up by inflation.