Annuities are an investment tool used to help fund retirement. Annuities pay out until the death of the annuity holder and therefore are often called life expectancy annuities. There are two phases of an annuity, and several different annuity options to choose from.
Phases of an Annuity
Annuities have two phases, the accumulation phase and the distribution phase. The accumulation phase is the period where money is being deposited into the annuity, essentially the premium payment period. Then there is the distribution phase which is when payment from the annuity begin.
There are different forms of annuities including the immediate annuity and the deferred annuity. With the immediate annuity, there is basically just the distribution phase. There is a single lump sum payment into the annuity account and then payouts generally start within a year. With the deferred annuity, there is generally still one lump sum payment, however the distribution date is set for a later time. So there is growth on the account through interest during the accumulation phase but no further deposits on the annuity.
The accumulation period and distribution period are flexible in terms of the type of annuity chosen. The phases can be combined, where one makes premium payments but is also getting a distribution.
Types of Annuities
There are many different types of annuities: fixed, variable, guaranteed, joint. In addition to the varieties of phases of an annuity, choosing the type of annuity gives an investment tool that is unique to each individual.
A fixed rate annuity allows payments to be predictable either in that they are the same every month, or that they increase by a fixed percent. A variable rate annuity has payouts that change depending on the investments made through the annuity, typically through bonds or mutual funds. The payment varies depending on how the investment portfolio is performing.
Guaranteed annuity allows the individual to select a beneficiary, should they die before receiving the payout on all of the money they invested. For example, perhaps an individual invested $10,000 but has only gotten $7000 in payouts at the time of death. The additional $3000 that was initially invested would go to the beneficiary. While this may seem smart, there are additional costs involved in designating a beneficiary and monthly payments are usually smaller.
Joint annuities allow more then one person to receive payouts from the annuity, typically a husband and wife. Payments don’t stop until both parties on the annuity pass away. Generally after the first individual on the annuity passes, payments are reduced but continue for the second individual.
Choosing to use a life expectancy annuity to help fund retirement can be a great addition to a retirement portfolio. There are many options to choose from to find the tool that best meets each individuals retirement needs.