Retirement Investments: What Are Annuities?

Annuities can provide a steady stream of income throughout retirement, alleviating the stress that you might outlive your funds. But, what exactly are annuities? Simply put, they are contracts between you and a financial institution (usually an insurance company). You, as the annuitant, pay either a lump sum or monthly premiums, and in turn, the company promises to provide you with a future stream of income.

Annuity Phases

Annuities have two phases: accumulation and annuitization. The accumulation phase is the period during which money is put into the annuity. The annuitization phase is when payouts begin.

Most Common Types of Annuities

There are several different types of annuities to choose from. Let’s talk about a few of the most common.

Immediate

An immediate annuity is funded by one lump sum of money. Payouts can begin as early as one month after purchase. An immediate annuity is used as a fixed, reliable income source as a supplement to other retirement income.

Deferred

Deferred annuities, in contrast to immediate, are paid out in the future. A lump sum or monthly premiums are paid to the insurance company during the accumulation phase. During accumulation, money grows on a tax-deferred basis. Annuitants only pay tax when withdrawals are made.

Fixed vs Variable Annuities

Fixed

A fixed annuity promises to pay a specific and guaranteed interest rate on account contributions. Fixed annuities are generally considered predictable and safe for retirement.

Variable

A variable annuity’s interest can fluctuate based on the performance of an investment portfolio. There is usually more risk involved as well as higher fees.

Help With Annuities

Do you need more help with annuities? Then visit Bob Carlson’s Retirement Watch!

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