Understanding Annuities/ April 26th, 2020
An annuity is an insurance product that can be used to generate income in retirement. They are also known as longevity insurance – they provide an additional form of income in case you outlive your retirement fund. The way it works is you make an investment in an annuity and in return receive income from it every month, quarter, year, or as a lump sum payment.
There are two basic kinds of annuities: deferred and immediate. A deferred annuity doesn’t pay out until you’re ready to take withdrawals. It has an accumulation period from the time you make your initial investment until the day you start getting income payments. During this period, the money you put into the annuity earns interest and the earnings grow tax-deferred. In contrast, an immediate annuity begins making payments soon after you make your initial investment and therefore has no accumulation period.
The amount you receive for either one will depend on whether you choose a fixed or a variable annuity. A fixed annuity pays you a guaranteed fixed amount of money for the rest of your life. A variable annuity allows you to choose from a selection of investments, then pays you based on the performance of those investments.
So which kind of annuity is right for you? That depends on your goals and the level of risk you’re willing to take.
If you’re still saving for retirement, consider a deferred annuity. You pay for your annuity while you work, long before you start to receive the annuity payments. The money you invest grows tax-deferred and, if it’s a fixed annuity, you’re guaranteed at least a minimum rate of investment return. A variable deferred annuity’s interest rate will fluctuate, so it’s riskier, but you’ll be able to decide which investments you wish to make.
If you’re at or near retirement, an immediate annuity may be the better option. You pay a single lump sum and immediately start receiving annuity payments. You can choose an immediate fixed annuity (steady predicable payouts) or the immediate variable annuity (fluctuating payouts).
As always, do the research before purchasing to see which annuity will fit your goals best.