Your Guide to Understanding Annuities

Do you have questions about annuities? If so, you’re not alone. Many have a firm grasp on investment plans that include 401(k)s and savings accounts. However, when you ask them about annuities, they’re lost. This guide will give you insights and answers into understanding annuities.

Annuities Defined

If someone believes they’ll outlive their retirement assets, they’ll go to an insurance company and draw up a contract that will ensure they still receive income. There are two different types of annuities including those that are deferred as well as immediate annuities. Annuities help individuals generate retirement income that’s guaranteed, develop retirement investments beyond their individual retirement accounts (IRAs) or 401(k)s, and create an accumulation of earnings that are potentially tax-deferred.

The Differences Between Annuities

For those who need a retirement income right away, immediate annuities are the optimal choice. They provide a stream of guaranteed income without having to wait. With this annuity, it’s possible to develop a lump sum from an annuity that converts into monthly income as well as quarterly or annual payouts. These payments can occur for a specific number of years, or you can receive the annuity at death. For those who are several years away from retiring but want to ensure there’s enough money available, a deferred annuity is a good choice. It’s possible to invest money that’s tax-deferred so that payments can be received at a later date.

Who Should Buy Annuities?

Once you take full advantage of your accounts with tax advantages like IRAs and 401(k)s, for example, then it’s time to consider an annuity investment. Remember that an IRA or 401(k) has the same tax advantages, but they don’t incur as many fees. When you’re ready to sign a contract with an insurance company and commit to the monthly payments, then an annuity is right for you. There are complexities involved with annuities, so be sure the insurance agent or your financial advisor can explain an annuity in detail as well as provide you with information regarding the highest paying annuity.

Be Aware of Withdrawal Penalties

When investing in an annuity, it’s essential to understand the fees associated with them. If you decide to withdraw funds from your annuity before you turn age 59.5, then you’ll experience a penalty. The withdraw penalty retrieving funds early is 10 percent as well as additional income taxes. There is also a surrender penalty that is based on the number of years since the annuity’s purchase, instead of the person’s age.

What to Do With an Annuity

Those who make this investment are developing annuity lifetime income. It’s essential for investors to think critically about how the annuity will benefit their retirement. When speaking to their financial advisor, they’ll go over topics like, “what is annuities explained,” during their explanation of annuities and variable annuity rates to help provide a clearer picture. Optimally, an annuity is best used for stretching retirement income beyond that of an initial investment like with an IRA or 401(k), for example.