A long-term investment, according to the Business Dictionary, is generally any investment with a maturity period of more than 10 years. Since annuities are investment vehicles designed to help you save for retirement, you would typically consider annuities to be long-term investments. A closer look at the types of annuities available and their main uses in retirement investing can help you choose the right one for your circumstances.
Annuities fall into two primary categories: deferred and payout, or immediate. You typically use a deferred annuity to invest and accumulate funds for retirement during your working lifetime. Investment earnings accumulate tax free, and withdrawals are taxed at ordinary income tax rates. Withdrawals made before age 59 1/2 are assessed an additional penalty tax of 10 percent. The tax deferral and withdrawal rules encourage you to hold onto your annuity well into your 60s. If you bought your annuity before age 50, you generally expect to keep it for more than 10 years, and that qualifies it as a long-term investment.
Variable Deferred Annuity
A variable deferred annuity is a variation on the deferred annuity, with investment returns dependent on the performance of various stock market instruments. The potential exists for higher returns than other types of guaranteed investments, with an element of market downturn risk. Because of the exposure to market conditions, variable deferred annuities should be kept for longer periods so you can recover from a drop in the stock market. Thus they are typically recognized as long-term investments.
Payout annuities are typically purchased when you reach retirement age and want to convert your accumulated savings to a stream of guaranteed income payments. Even though they are mainly used to generate income, they can still be considered an investment, as interest is earned within the payout annuity even as you receive income from it. A typical payout annuity is purchased at or near age 65 and is designed to last at least until age 85, making it a long-term investment of well over 10 years.
Life Income Annuities
The life income annuity is designed to pay you an income until you die. These are classified as long-term investments, because your life expectancy once you reach age 65 is 83 for males and 85 for females, according to October 2012 figures from the U.S. Social Security Administration.
- Jupiterimages/Photos.com/Getty Images