An annuity is a way to invest that can help you invest your money in order to be able to save for retirement in the future. Most people stress about saving for retirement unless they are billionaires to begin with, of course! Saving enough money to be able to retire is not only a daunting task but is also something that many people put off until they realize that it is too late to save an adequate amount to retire comfortably.
As part of your retirement plan, an annuity can make sense as an investment option for some people. However, annuities can also be confusing and irritate people who are planning for their retirement. Here, we are breaking down the information about annuities so that you are able to know if one will help you save for your retirement.
What is an Annuity, Exactly?
An annuity is a retirement option that will help you save money for a comfortable future. However, unlike a lot of retirement tools, the annuity option is a contract between you and an insurance company, not a bank or an investment company.
An annuity can be bought one of two ways:
- Lump Sums: A lump sum can be paid to invest in an annuity when you pay a lump sum of money to the insurance company.
- Monthly Payments: Other plans require you to make monthly payments to the insurance company.
When you give the insurance company money, they will invest that money. However, most of these rates are at a lower rate of payoff than you would get if you were to invest in either stocks or bonds.
When Do I See Payoffs?
Generally, once you reach a certain age, you get a monthly payment from your annuity that will last for a certain period of time. It might be your entire lifetime, and sometimes if it’s longer than your lifetime, your beneficiary will receive these payments upon your passing.
The tricky part is to choose which type of annuity is right for you. The following are types of annuities that you can choose from:
- Fixed Annuities: Fixed annuities are annuities that guarantee that you earn a certain amount of interest, but also offer a minimum guaranteed payout.
- Variable Annuities: You are allowed to choose your risk level when investing. You should choose wisely because you could either end up with a great payout or not end up getting much for your investment and your money based on the different investments you choose to make.
Annuities will make payouts on different schedules such as:
- Immediate Annuities: These annuities will start paying you back, so they can be great for a more immediate retirement investment or fund.
- Deferred Annuities: these annuities will begin to pay you back after a certain set period of time. You will pay taxes when you get your payments from the annuities.
What is the good and bad about using annuities?
- An extra stream of income will help you ensure you have adequate income during retirement.
- Guaranteed payments to you for the rest of your life (and possibly the life of the beneficiary if the time period is long enough)
- Once you put the money into an annuity it is hard to get back.
- Once distribution terms are set, the rest is generally out of your hands.
- The fees for annuities can be notoriously high and sometimes are higher than 3% per year. Retirement should compare to a retirement investment for a company such as Vanguard Management doesn’t charge annual service fees to keep an additional accountant service fee for a traditional Roth IRA.
- There are often fees for things like withdrawing money early or adding riders to your account (customizing your annuity to meet your needs).
These added fees and regulations can confuse people considerably when trying to determine if an annuity is the right investment option for them.
The Bottom Line:
Speaking to your financial representative will help you determine if an annuity is right for your personal needs.