What is an annuity? And is it right for you?
The definition of an annuity is a sum of money or an investment that is paid at regular intervals.
There are two main types of annuities:
- Fixed rate annuities – The primary goal of the fixed rate annuity is to save money for the long term. You will make monthly payments of premiums into the annuity and upon a specified date of maturation or when you are ready you can withdraw your funds.With a fixed rate annuity, you are guaranteed a certain payout amount based on the rate that was available or agreed upon at the time you purchased your annuity. Many people that are looking for a way to invest their money that offers little to moderate risk prefer the fixed rate annuity.
- Variable rate annuities – Variable rate annuities differ from the fixed rate varieties because there is not a determined rate at which you will compensated. The rate of return with themarket. Variable rate annuities are sometimes marketed to people that are capable of handling a higher level of risk.
Although the method of obtaining and maintaining these two types of annuities are the same, there are differences in how you will be paid in the long run. Also, the type of annuity that you choose will greatly affect the amount of money you can make in a certain period of time. Depending on your savings goals, one type of annuity may be preferable over another.
How does an annuity work?
An annuity works by transferring risk from the owner, called the annuitant, to the insurance company. Like other types of insurance, you pay the annuity company premiums to bear this risk. Premiums can be a single lump sum or a series of payments, depending on the type of annuity. The premium-paying period is known as the accumulation phase.
Unlike other types of insurance, you don’t pay annuity premiums indefinitely. Eventually, you stop paying the annuity and the annuity starts paying you. When this happens, your contract is said to enter the payout phase.
Deferred annuities provide tax-advantaged saving and lifetime income.
With a deferred annuity, you begin receiving payments years or decades in the future. In the meantime, your premiums grow tax-deferred inside the annuity. They’re often used to supplement individual retirement accounts and employer-sponsored retirement plan contributions because most annuities have no IRS contribution limits.
A fixed annuity for principal protection.
Fixed annuities pay a guaranteed minimum rate of return and provide a fixed series of payments under conditions determined when you buy the annuity.
During the accumulation phase, the insurance company invests the premiums in high-quality, fixed-income investments like bonds. Because your rate of return is guaranteed, the insurance company bears all of the investment risk with fixed annuities.
A variable annuity has investment risk.
Not all annuities guarantee a fixed rate of return. With a variable annuity, your premiums are invested in a variety of subaccounts, like mutual funds. Each subaccount has an investment objective and charges a management fee in addition to the insurance company’s fees.
We would love to help you work through the process of picking the Annuity that would work great for you and your retirement. Let’s talk and figure out how much you will need to be comfortable during your retirement, so you can enter your Golden years worry free.