Explaining Annuities

When it comes to saving for retirement, you have many options. Although this may make things more confusing, the variety of choices available to you is actually a good thing because you can tailor your savings plan to best meet your current and future goals. Annuities are one of your options, and the following information can help you understand how they can fit into your retirement plan.

One big benefit of annuities is that you can store more money for retirement in an annuity than an account like a 401(k) or IRA because there isn’t a contribution limit.  With most annuities, the money that you invest will compound tax-free, which is the other main advantage. Depending on the annuity, there may be a withdrawal limit for each year. Furthermore, there may be an early withdrawal penalty if you take money out before a certain amount of time has passed.

annuitiesThe two basic types of annuities are deferred and immediate. If you’re not ready to retire, then you will benefit most from a deferred annuity. If you’re about to retire, however, you may wish to purchase an immediate annuity, which is also known as a single premium annuity. With an immediate annuity, you will begin receiving payments right after you invest.

“The deferred annuity accumulates money while the immediate annuity pays out,” describes CNN Money. “Deferred annuities can also be converted into immediate annuities when the owner wants to start collecting payments.”

The second way to classify annuities is whether they are variable or fixed. Variable annuities have differing payments depending upon how well their investments perform. A fixed annuity, on the other hand, is exactly what it sounds like, an annuity that guarantees a set interest rate.

The benefit of a fixed annuity is that you can count on a certain payment so that you don’t come up short and have trouble paying your bills. A fixed payment also helps you budget how much you will need to save for retirement.

“This type of investment is risk-free – the insurance company assumes all the risk and guarantees that you’ll make the stated interest rate,” according to Chris Seabury from Investopedia.  “Fixed annuities are not tied to the stock market in any way.”

Variable annuities may be riskier, but they can also have bigger rewards. If you have a variable annuity, there may be times when your payment is smaller than you would have received with a fixed annuity, but you can also reap large rewards if the investments do particularly well.

“Variable annuities generally provide guarantees that you can’t get with other investments,” states Seabury. “For example, for a fee, you can add a death benefit feature to the variable annuity.”

Another way that annuities vary is in how they make their payments. Some annuities pay for the lifetime that a person lives during retirement, while others only guarantee payment for a certain number of years. It is also possible to choose to receive a lump sum with many types of annuities.

Because there are so many different types of annuities, talking to your financial advisor is the best way to find the investments that are best suited to your goals.


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