What You Need to Know About Annuities

You probably know what a 401(k) is and how it works, and you may know the ins and outs of Medicare. But do you know what an annuity is?

Annuities rank among the least-understood retirement savings options. In fact, the American College of Financial Services’ Retirement Income Literacy Study found that annuities ranked last in among knowledge areas measured.

More people might buy annuities if they actually understood them and the many benefits they can offer. Here’s a look at what you should know about annuities.

What Are Annuities?

Annuities are contracts between you and an insurance company that require the latter to distribute a series of regularly occurring payments based on premiums you have paid in. They differ from life insurance, which is only paid out when the policyholder passes away.

Annuities are long-form savings vehicles, and you can’t use them to store money and then take it out whenever you need it, like you do with a savings account. They are a guaranteed stream of income during retirement.

What Types of Annuities Can You Get?

You can choose from five main kinds of annuities:

1.      Fixed deferred annuity, which provides a guaranteed return rate.

2.      Variable annuity, which offers a return rate based on investment. Payouts may be higher but so is your risk.

3.      Immediate annuity, which begins giving a steady stream of income right after you buy in exchange for paying a lump sum.

4.      Fixed-index annuity, which ties a small part of the return to the market.

5.      Deferred annuity, which buyers can begin collecting as soon as they hit retirement age.

What Are the Benefits of Annuities?

Annuities appeal to those who value stability and prefer a low-risk approach to retirement planning. Performance of a fixed annuity is not tied to the market, unlike pension plans and 401(k)s. Instead, you receive a fixed, set amount that doesn’t change. Some types of annuities are tied to the market, but less so than others.

Annuities offer control of your money in a way many retirement options don’t. The regular income can be better for planning purposes compared to retirement options, whose payouts vary more depending on the market.

Plus, unlike with an IRA or other retirement options, there are no caps on how much you can put into an annuity each year. Finally, annuities are simple. The pay-in, payout structure reduces the likelihood of fraud and elder abuse because the portfolio is so much easier to manage.

Why Select Annuities?

One of the greatest benefits of annuities is peace of mind. You won’t outlive an annuity. You get a monthly payout until you die, and there’s a lot of comfort in knowing this income stream won’t dry up. That type of security has value at a time when people are living longer.

Those who avoid risk or dislike uncertainty may also find annuities preferable to investment or other ways to save for retirement. Plus, earnings on deferred annuities are also tax deferred, a financial incentive many find appealing.

Still not sure if an annuity is right for you? Ask the expert. Contact Jay today to discuss annuities and whether they’d be a good fit for you.