Determining whether an annuity is right for you isn’t easy, especially when it’s not the simplest subject to research and understand. Before choosing to invest in an annuity, you must first learn about what an annuity is, the different kinds of annuities, and what they mean for your future.
While it takes a lot more than an article to cover annuities in depth and detail (more like a book), there are key points to cover that’ll help you comprehend them. With that being said, it would be wise carefully read over the following three points before considering an annuity. Here is a basic look at how annuities payments can affect you.
What’s an Annuity?
Before diving into details, you must first know what an annuity is. In the simplest terms, an annuity is an insurance policy that pays out income. You can use it as part of a retirement strategy, being a popular choice among investors who want to receive income stream when they retire. When you invest in an annuity, you receive payouts on a future date or a series of dates. The income you receive from an annuity is dispersed monthly, quarterly, annually, or in a lump sum.
The amount of your payouts depends on a variety of factors, including the length of your payout period. You have the option of receiving payouts for several years or for the rest of your life. This depends on whether you opt to receive a fixed annuity (guarantee payout) or a variable annuity (payout determined by the performance of your annuity’s underlying investments).
While annuities are beneficial for retirement, they can also be a horrible investment choice for certain people because of their extremely high expenses. While insurance salespeople and financial planners will try to force seniors or other people in retirement to invest in annuities, it’s important everyone consider all the factors involved before signing on the dotted line.
The Different Types of Annuities
There are two basic types of annuities: immediate and deferred. You begin to receive payouts with immediate annuities soon after you make your first investment. In this case, you’d contemplate buying an immediate annuity if you’re approaching retirement age. Conversely, if you choose to invest in a deferred annuity, your money is invested for a period of time until you’re ready to receive payouts – usually in retirement.
The difference between immediate and deferred annuities is that deferred ones accumulate money while the immediate ones pay out. You can also convert your deferred annuity into an immediate annuity if you want to start receiving payouts. Your immediate or deferred annuities can also be either fixed or variable, depending on if the payout is a fixed sum or tied to the overall performance of the market. Alternatively, there are annuities that are a combination of both.
The Advantages of an Annuity
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One major advantage of annuities is that they let you stash a large amount of cash and defer on paying taxes. As opposed to other tax-deferred retirement accounts like 401 Ks and IRAs, there’s no annual contribution limit on an immediate or deferred annuity. What this does is it lets you put more money away for retirement, providing special convenience to those who are closest to retirement age and need to stash away as much cash as possible.
The money you invest into your annuity compounds yearly without Uncle Sam sending you a tax bill. The ability to have the money you’ve invested continue to work for you is a major advantage over investments that are taxable. When you decide to cash out, you can choose between a lump-sum payment and guaranteed payments for a specified length of time or the rest of your life.
Many retirees choose the latter option because it provides a steady income stream. To figure out what kind of income you’ll have, use the annuity calculator by Fisher Investments so that you can take the various rates into account.
After studying the various considerations posed by this piece, you should probably have a better idea of how annuities work and about what they mean to you. Have you invested in annuities? If so, what were your experiences?
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