Including annuities in your passive income portfolio?

By: ispeculatornew
Date posted: 03.03.2011 (5:00 am) | Write a Comment  (0 Comments)

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Passive income is the holy grail by most accounts and something that I personally aspire to, it provides a unique lifestyle and the liberty to enjoy it. The two big methods that we have looked most into in order to get decent passive income is building a dividend portfolio and through our internet properties business. Of course the ultimate goal for a passive income portfolio is always to enjoy enough income to live life to its fullest and have the portfolio grow. It’s easy to get started and can even be done with as little as $5000.

In the past we’ve discussed the following methods:

dividend portfolio (look for dividend growth and a diversified dividend portfolio)
-business (such as our terrific internet business)
-real estate (through ETF’s for example)
-other financial products

I’ve been public about the fact that so far the best source of passive income and the best investment of my life has been the one in my internet business but I thought I would look into one of those financial solutions today; annuities.

What is an annuity and how does it help generate passive income?

An annuity is a product that you can buy for a given amount that will generate cash flows for as long as you hold it. The most simple version of an annuity would be one that pays 5% without any adjustment for inflation over the course of your life. Someone who buys $1,000,000 worth of that annuity will generate $50,000 every year, paid annually or more frequently. That is a simple annuity but there are a million different ways to do this investment.This type of product is gaining traction and there was $32.1 billion worth of annuities sold last year in the US.

What is different from one annuity to another?

Anything you can possibly imagine can be customized. The amount you receive could depend on inflation, it could be linked to the returns of the stock market. You could be receiving back your amount after a given number of years, etc. There are many different ways. You could have penalties if you want to get out earlier.

What you need to look out for?

The biggest thing is to carefully understand the product that you are buying. Is there a cap in the performance that you will receive? For example, if you will receive the return of the S&P500, are you capped at a maximum of 5% for example? Also, what are the exact fees that will be charged? You need to understand these conditions because annuities, like many other financial products can turn out to be very bad investments if they are not carefully done. They are a type of structured/derivative product and while you might not be able to price the product, you should understand exactly what you are buying before signing anything. Bring someone independent if you are unsure.

So am I against annuities?

Certainly not and in fact I could very well end up buying one at some point but I think it’s easy to oversimplify how these work and end up getting a very bad deal. They can become very good supplemental (or complete) solutions to generate additional passive income and make your retirement less risky and more enjoyable.

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