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Annuities Explained

Annuities are often misunderstood, yet they can be an incredibly effective retirement vehicle. If you are interested in building your retirement income, then you owe it to yourself to have annuities explained to you.

If you are interested in annuities, then chances are you are interested in learning about alternative ways to maximize your retirement income.

What is an Annuity?

In short, an annuity is an investment that is structured in such a manner to allow an individual to receive guaranteed, lifetime income payments. Many individuals use annuities as a way to build tax-deferred savings. Most annuities are offered by insurance companies (or charities or trusts) as a contract which guarantees lifetime income payments in exchange for either a lump sum or steady premiums.

What is the Purpose of an Annuity?

The first question you may ask is: what is the purpose of an annuity? Most individuals choose annuities as a retirement vehicle. It may play an important role in an individual’s investment portfolio, and it may work to supplement an individual’s other retirement income. However, annuities can be tricky, and they don’t always guarantee a healthy return. However, for many individuals, the risk is worth the payout.

Are Annuities Right for Me?

Annuities, just like any other investment, may not be right for everyone. However, many individuals turn to annuities as a way to guarantee lifetime payments. In addition, annuities have no contribution limits, making them an attractive option for individuals looking for a place to invest. An investment advisor may ask you several questions about your retirement goals before recommending an annuity, including:

  • How many years do you expect to live in retirement?

  • How do you imagine your retirement lifestyle? The advisor is finding out how much you will need to live each year once you are in retirement.
  • What are your monthly expenses and debt obligations?

Just like an insurance policy, annuities come in different forms. Therefore, ask your investment advisor to have annuities explained by separating the different types of annuity products, which include:

  • Immediate Annuity – An immediate annuity allows an individual to begin receiving annuity payments before one year after they begin paying premiums on the annuity. This annuity is also referred to as “payout” annuity or an “income annuity.”

  • Deferred Annuity – A deferred annuity is an ideal way to grow your savings, tax deferred.  This annuity also promises future annuity payments.

  • Fixed Annuity – A fixed annuity offers a set return on your investment. The interest rate, which is set by the insurance company, offers seniors the promise of fixed income payments.

  • Variable Annuity – A variable annuity is a bit riskier than a fixed annuity because it allows the individual to invest in a variety of funds, based on the risk they are willing to take. If the investments perform well, annuity payments can be bountiful; if they fail, it can be disastrous.

  • Equity Indexed Annuity – An equity indexed annuity is much like a fixed annuity; however, the interest rate on the annuity depends on an outside index, such as the stock market.

With various annuities from which to choose, you can find one that provides you with the stable income you want at the right payment price.


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