When you have a lump sum of money and want to invest it, decisions must be made weighing long-term against short-term investments. One form of long-term investment is an annuity. An annuity pays you a fixed amount of money over a specific time period on a regular basis. Depending on the size of the annuity investment, this payment can range from a little extra spending money to enough money to live on after you retire.
An advantage of an annuity is the reliable income that it produces, according to annuity-pros-cons.com. The annuity establishes a known schedule for when you will receive your money and how much money you will receive. This allows you to establish your own salary from an annuity. Along with having the ability to know how much money you will be receiving, you can also delay the taxes you will be paying. You do not pay taxes on your annuity until you actually receive the money, according to annuity-pros-cons.com.
While an annuity pays you a known amount for a specific amount of time, which provides reliability, it cannot be changed. This means that once you set up an annuity, you will not be able to change the amount you are receiving and the frequency of the payments, according to annuity-pros-cons.com. This means that if you find an investment that has a higher return, you cannot pull your money out of the annuity without selling the annuity to someone and receiving cash for that sale. Another potential problem with annuities is that they are not all the same. You must read carefully to determine payment schedules and any fees associated with your annuity.
Evaluate the Time Value of Money
Delaying your income can be either an advantage or a disadvantage with an annuity. It depends on your own financial situation. If your employer provides a reliable retirement program, receiving your money immediately and investing it in other options might be your best choice. Retirement plans depend on the likelihood of the company staying in business, though. Government retirement plans are less likely to fail, as the government is more secure than a private business, as evidenced by the Enron collapse. If you do not have a secure retirement plan and receive a large sum of money, this is your chance to establish your own retirement plan using an annuity. The reduction in risk by investing in an annuity allows you to know you will have a specific amount of income in the future after you retire. This can be used to supplement retirement plans offered by your employer if you feel their retirement plan is unstable or insufficient for your future life expenses.
On the other hand, if you have immediate expenses that must be paid, investing in an annuity might not be the best choice. If the interest charges on your debt are so high that you run the risk of bankruptcy, you will want to pay off your bills instead of investing in an annuity. If your interest charges would not run you into bankruptcy, but would be higher than what you can earn in an annuity, that is another reason to avoid investing in an annuity. An additional reason could be if you anticipate large expenses such as a new car, a college education, or the purchase of a home in the near future and you don't have the savings to pay for those expenses.