Retirement Annuity Information
With millions of Americans preparing for retirement, annuities are becoming a popular option for those concerned with outliving their savings. There are various types of annuities available to prospective investors interested in boosting their income, such as fixed or variable annuities. Potential investors should consider the pros and cons before purchasing an annuity.
Other People Are Reading
-
What is an Annuity?
-
Annuities are contractual agreements between individuals and insurance companies. The contract allows the investor to make a lump sum payment to the insurance company, after which the insurer agrees to make periodic payments to the investor on a future date. The payments may be monthly, quarterly, semi-annually or annually. There is no limit on the amount an individual can invest in an annuity. The amount often depends on the individual's personal financial situation and overall financial goals.
Types of Annuities
-
There are many variations of annuities, but the two basic classifications are fixed and variable. Fixed annuities guarantee the investor a minimum rate of earned interest on the principal lump sum. Fixed annuities also guarantee fixed payments to the investor for a pre-determined amount of time. Variable annuities, in contrast, allow investors to choose from a pool of investments. The rate of return and subsequent payments will depend on the performance of the investment. Unlike fixed annuities, variable annuities are regulated by the Securities and Exchange Commission.
-
Deferred vs. Immediate Annuities
-
Most investors opt for deferred annuities, which begin payouts at a later date. Others may choose to begin payments immediately after purchasing the annuity. Payouts can be either fixed or lifetime payments. Fixed payments are made for a pre-determined number of years, while lifetime payments will be paid out for the duration of the investor's life.
Benefits of Annuities
-
Individuals are limited in how much they may contribute to retirement accounts such as 401(k) and IRA plans. Limited contributions or low-income employment may put some individuals at risk of outliving their savings. Annuities are popular with adults who feel more at ease with a guaranteed source of income. Some annuities may also be a good option for investors concerned with inflation. While pension funds and personal savings may lose their purchasing power, certain annuities are protected from inflation. Annuities are also an effective strategy to diversify an investor's portfolio, allowing investors to benefit from maximum returns.
Drawbacks of Annuities
-
Once an annuity contract is finalized, investors will lose access to their funds until the payout period begins. Additionally, annuities are conservative investments that build slowly often at a low rate of interest. Gains from annuities may not be as high as other stock market investments.
-
References
- Photo Credit check in macro image by Alexey Klementiev from Fotolia.com
