Deciding if an annuity is the right investment for you means understanding how an annuity works and examining your financial goals. As part of an overall retirement portfolio an annuity can be a good option. Annuities allow you the security of having additional retirement income and/or money to leave behind in an inheritance for loved ones.
What is an Annuity
An annuity is sort of like a cross between a savings account and an insurance plan. As an investor, you decide how much money you’d like to put in your annuity. The money will remain in the annuity until you reach the retirement age of 59 ½, and then you can choose to get payments from the annuity. The reason an annuity is like an insurance plan, is that it’s basically a pool of money from all investors. Some people will never get a pay out or not the full amount of their initial investment because they will pass away. Others will live well beyond the expected age and will keep getting payments because of there is that pool of money to draw from. Once you start receiving your payments from your annuity, you will get them for the remainder of your life. The annuity company might expect that you will live to age 80, some people will not live nearly that long, others might live until 105.
Annuities are tax deferred investments so they are a good option for funding retirement savings. Taxes are not paid on the income until it is received through disbursements. This helps save money short term, and one can plan ahead to make the tax payments later on.
As an Inheritance
Some people like to save the money they’ve invested in an annuity as an inheritance for their loved ones. In this case, it is necessary to have a rider attached to the annuity to specify who the remaining payments should be distributed to – the beneficiary, otherwise the unused money goes into the annuity companies investment pool.
Types of Annuities
There are both fixed and variable rate annuities. With most long term investments, a variable rate usually produces the higher profitability. A fixed rate offers the security of a specific payment amount. Deciding what your annuity will be used for, can help you decide what type to choose. If you are investing early or don’t plan to use the money unless absolutely necessary, then a variable rate is probably a good choice. If you are investing late, or know that you will need the payments to supplement your retirement income then a fixed rate could be the better choice.
With any retirement savings or investment option, it’s best to examine how this particular piece will fit into your overall savings or retirement plan. For a tax deferred way to save, and guaranteed additional income in retirement, an annuity can be a good investment.