How Does an Annuity Work and Should You Get One?

December 18, 2018

 

An annuity is a financial product that can help you save for retirement. Annuities can provide the steady lifetime income you need when you retire, yet many people feel intimidated by the concept and don’t bother to look into getting one.

But annuities don’t have to be complicated. In fact, they can be more dependable than some other forms of investing. Take a moment to learn more about annuities and decide if they could help you achieve your financial goals for your retirement.

 

What Is an Annuity?

Annuities are sold by insurance companies or financial management firms. There are two parts to an annuity: pay in and pay out.

During accumulation, you make payments into the annuity, similar to a mutual fund. At a certain predetermined point, the annuity will annuitize and begin to pay out to you. Many annuities pay back at a steady rate over a period of years, though you can also choose one that pays out a lump sum or offers returns immediately.

Many people pay into their annuity while they are working and begin receiving payments when they retire at 65, essentially relying on the money as they would their paycheck.

 

What Types of Annuities Can You Choose From?

There are two main types of annuities.

A variable annuity depends on how investments made by your management company perform. You could see a greater upside with a variable annuity, but you could also see a bigger downside. You also receive more control over your investment, as you can have input on where that money goes.

A fixed annuity is much more predictable. It guarantees fixed payments at regular intervals. Often the management company will place money in bonds and other steady forms of investment.

Annuities also come in deferred and immediate payouts. You enjoy greater tax advantages with deferred, but you draw your money more quickly with an immediate, which is better suited to people near retirement.

 

Why Pick an Annuity?

During the Great Depression, many people turned away from the volatility of the stock market and toward annuities, which were seen as a safer, steadier choice. A fixed annuity is a contract with the insurance or financial institution you buy from. While they make investments using their money, they also take on responsibility for any risks — you do not.

Today, with pension plans eliminated at many companies, annuities have enjoyed renewed interest. Annuities also offer flexibility. You can customize them, too.

Other benefits of annuities include:

  • They allow you to save more if you are already maxing out your annual 401K contributions.

  • You enjoy tax advantages. The earnings on a deferred annuity compound without you paying any taxes, meaning it will grow more quickly.

  • There are generally no contribution limits.

Are You Interested in Learning More About Annuities?

Annuities offer a smart way to invest money, especially as a secondary form of savings when you already have an IRA or 401K. Want to know more about them? Contact Jay to get more information about annuities.

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