How Does an Annuity Help?
An annuity is a contract that is designed to be a source of income during retirement and the rest of your life. You simply make monthly payments to an insurance company and as such, they agree to help that savings grow until retirement (59 ½) then send you payments.
Owning an annuity plan helps to allay the fear of not having enough savings for the long-term. Not everyone can relay solely on Social Security benefits and the limited amount of savings you currently are banking.
By purchasing an annuity, it will help with periodic payments that can help cover your living costs and serve as a buffer during your golden years. Unless you have wealth like Warren Buffett, than you do not need any annuity benefits.
However, an annuity is a financial complement to any other retirement income sources you may have in place like Social Security and/or pension plans.
Who Issues and How Are Annuities Issued?
The main issuer of annuities are insurance companies. Other financial entities include distributors, mutual fund companies, banks, independent brokers, and financial advisors/agents. You invest in annuities by purchasing premiums. Senior citizens can pay for annuities with funds from an employer-sponsored retirement plan like a 401(k) fund or from their own savings account.
How Annuities Perform
Annuity payout payments are based a person’s age, interest rates, and how much capital is invested. Annuities payout the principal and interest at the end of a specified period. If you choose an option that includes a lifetime income, the payment amount is calculated on the number of months between your current age and your expected life age.
For example, at age 65 and you are in good health, expecting to live until 80, your payment income will be based on 180 months and beyond. In other words, if you can wait until well after retirement age, the larger your monthly payments will be.
When you are ready to receive retirement payments from your annuity, here are your options. You can either take it in a lump sum or set up payments for the rest of your life so that you are receiving a steady stream of income.
Types of Annuities
Annuity plans are available as fixed, variable, and indexed.
• Fixed Annuity
A fixed annuity is best suited for older investors who are close to retirement age. It guarantees a specific amount based on interest rates, each month. The interest rate can be assured for a specific timeframe, such as one year or 10 years. Its returns are between 3%, 10%, or higher depending on the current interest rate.
Fixed annuities are better than purchasing a CD from a bank and it is available with a higher interest. Fixed annuities are provided as a single premium which means that older individuals can purchase as many fixed annuity amounts as they choose.
• Variable Annuity
As an investor, if you choose the variable annuity plan, it means that you are dabbling in the stock market. The premiums being paid to the insurance carrier are in accounts that are tied to bonds, stocks, and/or money market funds.
Variable annuities are a greater risk than a fixed annuity. Also, payouts will be different for investors depending upon how the market is responding. Yes, returns can be greater than a fixed annuity, while principles are at risk.
• Indexed Annuity
Interestingly, an indexed annuity is a cross between the above fixed and variable annuities. It too is tied to the stock market and the S&P 500 index. Your returns can be sheltered, if handled properly, your principle may not become a risk factor. No matter what the market does, your only risk is to the interest earned.
An additional benefit of deferred annuities are it tax category. Investors do not need to report this growing income until they start to receive payments. Please realize however, annuity tax deferral plans work the same way retirement plans work. This is to say that if you take money from your annuity before the specified age, a 10% penalty is taken.
Who Is An Annuity A Good Investment For?
The more common age to invest in annuities is 45 to 65. For an annuity to provide its maximum financial benefits, it should accumulate funds for around 10 years. It also depends on the type of annuity you plan for your retirement age. Annuities are designed to keep our retirement savings secure as an additional source of income.
Also, persons in their 40s or 50s still have enough time invested to handle investment risks and losses. As a young person in their 30s, the earlier you purchase an annuity the more time your premiums can benefit from tax-deferred growth.
If younger persons are contributing to IRAs or 401(k), investing in a tax-deferred annuity may also be a good idea, if they are not carrying other financial burdens like college loans.
Younger persons who wish to purchase annuities, the factors they should consider include being prepared to make regular investment contributions, especially if this product does not always grow? Investing when you are younger gives you more time if there are losses.
As a retirement income, payments can be received monthly, quarterly, annual, or opt for a lump sum. Older aged person who opt for “immediate” annuities is a great option as you approach retirement age.
Those who opt for deferred annuities will earn greater principal. Employer-sponsored annuity plans allow investor to delay payments until after age 65. This helps seniors to reduce their taxes and the payouts can last a lifetime.
Types of Pay Outs
As previously stated, retirees are guaranteed a specific payment amount. If your death occurs before the end of the period, then a beneficiary can receive the remainder payments for your previously specified period.
Other payout payments include the following:
• Lifetime Pay Outs: Your income is only available while you are alive. Payouts can either be a variable or fixed. Whatever you invested is your payout income.
• Joint and Survivor Payments: Your beneficiary will receive your payouts for the rest of their life upon a death, i.e., wife and husband.
• Life With Certainty: Upon retirement, you receive a guaranteed payout for life. Upon the investor’s death, whatever time is left will be received by your beneficiary for the remaining time so named in the contract.