What Are Annuities?

An annuity is a financial product designed for people at or near retirement age who would like to receive a steady stream of income until they pass away. In exchange for a lump sum, the insurance company pays you every month or every year, and you can live off this money during your retirement. In some cases, your annuity ends when you die, but many products allow you to pass on some of the money to your descendants.

How Do They Work?

There are various types of contracts, and they all work slightly differently. If you’re ready to stop working and start living off your annuity, you can purchase one that begins paying out straight away. This option is best for those looking to increase their retirement income. However, many people start paying into an annuity many years before they plan to retire. The major advantage of opening a deferred annuity is that the money can grow tax-free until you withdraw.

If you don’t like taking on risk, you can buy an annuity that pays out a fixed sum. This type of product has a guaranteed interest rate, and there is very little chance of losing your money. Other options allow you to achieve higher returns, for example by tracking a stock market index or investing directly in the markets. However, they are riskier, and your income might vary if you purchase such a product.

Who Are They Right for?

An annuity can be a good option for many people because it isn’t taxed until you withdraw, so you save a lot of money during your working years. Additionally, it provides retirees with a steady and lifelong stream of income, and it often allows them to leave some money to their descendants. Unlike other products like the IRA and the 401 (k), an annuity doesn’t come with a contribution limit, so it’s a good choice for high earners.

If you choose an annuity at random, you might be charged high commission fees and ongoing charges. Because the products are often complex, it can be hard for individuals to know whether a given annuity is a good choice. The best way to avoid disappointment is to work with an insurance agent who can help you compare various options and choose the one that offers the best value for your money.

An annuity is a great option for people approaching retirement age because it allows them to receive a steady income for the rest of their lives. There are various options, and while some start paying out immediately, others are deferred. You can also choose what your annuity is invested in. Some are very secure, while others are riskier. If you’re curious about this financial product, you should discuss your options with your local insurance specialists.