An annuity is a financial resource that can ease your mind about your financial future, guaranteeing income for you for the rest of your life and even potentially giving your beneficiaries a lump sum of money towards their future.
We’ll help you understand what a fixed income annuity is versus other types of annuities, how they work, and what options are available to you so that you can have peace of mind regarding your financial future for retirement.
What is an Annuity?
An annuity is a customizable agreement between you and an insurance company. You agree to pay a premium, either in a lump sum or in a series of payments; the insurance company promises to provide steady income payments, either within a year or at a later date as you agree on, for a set period of time. They are optimized resources that allow you to manage your finances for the foreseeable future, whether retirement is just over the horizon or still a good way off.
Your income stream is legally bound via contract, backed by the insurance company, and guaranteed according to the terms of that contract. There are several ways you can lay out your preferences for how you want to pay out your premium, receive your annuity income, and take on risk for the chance of a higher return.
The Benefits of an Annuity
Annuities offer many benefits, especially when compared to other options that are subject to the market’s volatility or that don’t provide as many benefits, especially if you play your cards right and entrust your annuity contract to an insurance company with a longstanding history of paying its debts.
Longevity Risk Management
One of the most critical factors of an annuity is that, when configured as such, it can last you for a lifetime, ensuring that you receive payments until your death. Getting an annuity transfers your longevity risk, the worry you’ll outlive your income, to the insurance agency. This annuity type is called a lifetime annuity. Fixed-period annuities usually last a period of 20 to 30 years but, in essence, still offer the same protection and reassurance depending on how long you expect to live.
You can also set up your annuity to be transferred to your beneficiary if you want, giving your next of kin a steady source of income over a period of time. Depending on the annuity, the benefactor can immediately make a partial or complete withdrawal, sell it, or continue to receive the regular payments until the annuity expires.
Peace of Mind
Another great benefit of annuities is the peace of mind they offer. Whether it’s a tool to secure your income for the rest of your lifetime or a way to tax-defer your income to maintain a higher quality of life, the peace of mind an annuity offers cannot be easily dismissed. Here’s a quick overview of how different annuity types can give you peace of mind:
- Immediate annuity – An immediate annuity starts paying out within a year, giving you a stable income that guarantees the principal plus interest. Those who purchase an immediate annuity are usually close to retirement and may roll in their 401(k) to maximize their benefits during retirement.
- Deferred annuity – A deferred annuity kicks in a set period of time after you finish paying the premium, either in a lump sum or in a series of payments. These annuities are tax-deferred, meaning you pay taxes on them when you start receiving payments. Upon entering retirement, it’s likely that you’ll be in a different tax bracket, saving you more money on your taxes.
Secured Income
If there’s one thing that annuities are known for, it’s their security. An annuity is not an investment as such; it is instead a contract. Barring any extreme circumstance, the insurance company is legally obligated to issue your payments accordingly, protecting your long-term interests. Especially during retirement, when finances can be a major headache, a secured and protected income is exceptionally beneficial.
There is some level of risk associated with annuities that you should be aware of, depending on which type you opt for:
- Fixed-rate annuities – Fixed-rate annuities offer a guaranteed rate that will not change, guaranteeing the interest earned on your annuity. Some fixed-rate annuities are only fixed for a certain period after purchase and may be subject to slight changes based on the yearly evaluation. Nonetheless, fixed-rate annuities are low risk with a predictable reward.
- Indexed annuities – Indexed annuities vary depending on the performance of an index fund, such as the S&P 500. These funds tend to be mostly stable, but if the index fund rises or falls, so will your annuity payout. Indexed annuities are still more stable than investing in index funds directly since they offer a floor and a ceiling that your annuity payout cannot go below or rise above.
- Variable annuities – Lastly, variable annuities are the high-risk form since they depend on the performance of the sub-accounts associated with the annuities. You have the potential of receiving a higher payout if they do well, but if they do poorly, your annuity payouts will be lower.
Of course, there’s a degree of risk with any investment. Still, many people consider annuities among the safest options out there, even more so than other secure money options like CDs. The security they offer for a lifetime and your beneficiaries can increase your quality of life by providing a better return on your contractually obligated investment and the flexibility to protect your wealth in the long term based on your preference, risk assessment, and payout preferences.
The Bottom Line
An annuity can increase your quality of life in several ways, from providing longevity risk management to offering a higher level of financial stability than other investments. It’s a resource that’s well worth looking into, whether you’re a younger investor already maxing out your IRA payments or someone looking to retire within the next year or two.
Life is filled with complexities, and as you approach retirement, financial security might be foremost in your mind. With the obstacles of aging in mind, you may find yourself taking extra precautions with your life; taking supplements such as Nerve Control 911 to stay healthy, staying up-to-date on appointments, and making sure you get the most out of life. But, rest assured, that when you find the right insurance agency to set up an annuity, you’ll be preparing for a better quality of life during retirement.
