What Is An Annuity?

Annuities, what are they?  Do they make sense for you?  Are there good ones, bad ones, scams??

What Is An Annuity?

An annuity is an insurance product that pays out income, and can be used as part of a retirement strategy. Annuities are a popular choice for investors who want to receive a steady income stream in retirement.

There are four distinct types of annuities and you want to purchase one because you want income.

Immediate Annuity

You put in a lump sum of money and you get income for as long as you live.

Fixed Annuity

Fixed annuities are very secure.  YOu put in your money and you know exactly what you will get out. They grow tax deferred.  When it matures you can pull out the money and do something else with it.

Variable Annuity

Variable annuities can go up and down iwth the market.  You can gain and lose money.

Indexed Annuity (Fixed Indexed Annuity)

Is designed for people looking for safety and potential growth.  If the market goes up, you can participate in the gains, but you don’t get all the gains.  If the market goes down, you can’t lose your interest or principle.

Hybrid Annuity

Has not been around too long and is one of the most innovative types of annuities out there.  Essentially, it uses combinations of all four types of annuities.

Challenges we See with Annuities

  • People have a set amount of money but in the last 12 years the market has been volatile.
  • Interest rates are rock bottom and it’s hard to make money.
  • Retirees are taking withdrawals while the market is going down
  • People are living much longer now and need their money to last longer.

How Annuities Work

  • You make an investment in the annuity
  • The annuity makes payments to you at a future date or a series of future dates (steady income)
  • Payments can be maid monthly, quarterly, annually or even lump-sum.
  • You can opt to receive payments for a set number of years or forever.
  • Annuities typically have high expenses and might not be right for everyone.

Tax Benefits of Annuities

Annuities grow tax-deferred.  However, when you withdraw money from the annuity you must pay taxes on the gains, but the amount you originally invested is not taxed again.

What Are The Advantages of Annuities?

  • The biggest advantage is annuities let you stock away large amounts of cash and defer paying the taxes – this lets your money grow faster.
  • Annuities have no annual contribution limit

What Are The Disadvantages Of An Annuity?

  • High Commission Fees – Annuities are typically an expensive investment vehicle – some annuities can cost you 10%.
  • Surrender Charges – If you pull out money before your term, you could pay hefty surrender charges.
  • High Annual Fees – certain annuity types charge very high annual fees.  Some variable annuities charge as high as 1.25% of the annuity value just to keep it open!

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