When it comes to the various choices available for retirement savings, it can be confusing to figure out the options that work best for your personal situation. From IRAs to pensions, there are many ways to ensure you’ll be living your Golden Years comfortably with income to spare.
One of the most complicated options for retirement savings in terms of how much people truly understand about the investment vehicle is the annuity. If you’ve ever become glassy eyed or have zoned out when someone is talking about their annuity because you don’t have a clue what exactly they’re talking about, you’re not alone.
But it is easy to break down the basic ideas of what an annuity is…
Annuities are Insurance Products
Essentially, an annuity is a type of insurance product that pays out money over time. Because the payments are disbursed over a designated period of time, an annuity can be an attractive option for retirement savings for those who want some type of guaranteed income.
When you buy an annuity, you pay a lump sum fee upfront. After a predetermined amount of time, the annuity begins to pay you money (some of the payment options through which you can elect to have your payments sent are weekly, monthly or even a lump sum).
Types of Annuities
In general, there are two main types of annuities: a deferred annuity that means you won’t receive any payouts until after a certain amount of time has passed (this is the best option for those wanting to make an annuity into a retirement savings vehicle) and an immediate annuity that begins to pay out money to you right after you fund the initial deposit.
Both of these annuities can be a fixed annuity that promises you a guaranteed payout or a variable annuity where the amount of money paid out is dependent upon the investments that fund the annuity.
Risks and Rewards of Annuities
As with any investment, annuities do come with their own set of risks. The most detrimental of all would be the risk of buying the annuity then passing away before you can begin to collect the payouts. Even if you have a will or a trust, nothing of the remaining funds would be passed down to your family members. Also, annuities can be wrought with fees so do your homework when deciding among all the various options.
In terms of the rewards of annuities, they can be great given the proper mix of great investments funding it, a reputable, competent company backing it and choosing what works best for your needs.