The Beginners Guide to Annuities

What is an Annuity? - An annuity is one of many tools available for retirement. It is technically an insurance based product, but can also be arranged and purchased through private financial institutions in addition to your insurance provider. It enables the bearer to maintain a steady income throughout retirement.

So, how does it work exactly? - You purchase the annuity and make payments. Payment amount and frequency are variable. When you retire, the annuity becomes your income source. The investment you've made in it becomes your income. Depending on your options and how you've chosen to set up the annuity, your payments can be structured from monthly to one lump sum.

Income for the duration of my retirement years? - You can receive payments for the rest of your life, or for a predetermined number of years. The amount paid to you depends on a number of factors; you may opt for a guaranteed payout amount, or, a payout influenced by your annuity's underlying investments performance.

Is there just one kind, and that's it? - There are essentially two types: immediate or deferred. The differences between them are as follows - if you purchase an immediate annuity, you can begin receiving payments quickly after the initial investment. If you opt for a deferred annuity, your money is invested for a set period of time and withdrawals can be made at a later date (during retirement). Annuities can also be categorized as fixed or variable, these distinctions are dependent on whether the payments are a fixed amount or linked to a group of investments or even a combination of these factors.

Fixed? Variable? What? - With a fixed annuity, you aren't responsible for the investments. The insurance company you purchased the annuity from will take care of that for you. The return is pre-determined beforehand. Conversely, a variable annuity allows you to choose how your money is invested in sub-accounts; therefore, the value of your annuity is dependent on how your investments perform.

Are there any benefits? What about taxes? - One of the biggest deciding factors to look at with an annuity is how much you're able and willing to contribute to it. With an annuity, there is no cap or limit on how much you may contribute. To some, this makes it a more attractive option than an IRA or 401k, both of which have limitations with regard to contribution amounts. Here's the good part: money that you invest accumulates tax deferred. The amount you contribute is not taxed, but your earnings are taxed at your regular rate of income.

How Can I Be Sure An Annuity Is Right For Me? - If you have adequate funds and have exhausted your options with traditional retirement strategies (IRA's, 401k), the tax free growth of an annuity is a possibility to consider. But you must be willing to put money away for years on end - a savings discipline that is not as easy as it may seem. Also, you must understand that any payments made to you will be taxed as regular income, despite the fact you may have owned the annuity and contributed to it tax free for years.

Like any investment, whether it be related to retirement or not, you need to ask as many questions as possible with regard to the positives and negatives of the situation. Carefully review the information you'll be given and if anything at all is unclear or does not make sense, ask about it. An annuity just might be the perfect fit for your retirement plans.