Annuities are financial products designed to provide a steady income stream, typically for retirement. They are a contract between you and an insurance company, where you make a lump-sum payment or a series of payments, and in return, the insurer agrees to provide regular payouts, either immediately or in the future.
What Are Annuities?
Key Features of Annuities
- Tax-Deferred Growth: Earnings on your investment grow tax-deferred until you withdraw them.
- Guaranteed Income: Depending on the type of annuity, it can provide lifetime income, which is especially valuable for retirement planning.
- Customization: Options to tailor payouts, riders, and terms to meet individual needs.
- Risk Management: Protects against outliving your savings (longevity risk).
Types of Annuities
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How Annuities Work
Accumulation Phase:
- During this phase, you contribute to the annuity (either a lump sum or installments).
- The investment grows tax-deferred
Distribution Phase:
- The insurance company pays out the income based on the agreed terms.
- Payouts can be for a fixed period or a lifetime.
Common Payout Options
- Lifetime Income: Payments last for the rest of your life.
- Period Certain: Payments for a set number of years, even if you pass away.
- Joint and Survivor: Payments continue for your spouse after you pass.
- Lump Sum: A single payout of the accumulated value.
Advantages of Annuities
- Lifetime Income: Eliminates the fear of running out of money in retirement.
- Tax Advantages: Tax-deferred growth helps maximize compounding.
- Flexibility: Various options to suit different goals and needs.
- Death Benefits: Some annuities offer payouts to beneficiaries after death.
Disadvantages of Annuities
- Fees and Expenses:
- Surrender charges for early withdrawal.
- Management fees for variable annuities.
- Illiquidity: Funds may be locked for a period (surrender period).
- Complexity: Can be difficult to understand without proper guidance.
- Inflation Risk: Fixed annuities may lose purchasing power over time.