Financial independence is a common goal among retirement planners. A steady stream of income will ensure your financial stability as you (and your spouse) age. Many retirees use annuities to help prevent the possibility of outliving their savings. And, how does that work? Essentially, an annuity exchanges present contributions for future income. It’s a contract between you and an insurance company. The basic formula is: you purchase the contract and then your payouts begin either immediately or deferred.
Immediate? Deferred? What’s the difference?
Immediate annuities are just what their name suggests – immediate. These are annuities that begin payout right away, or shortly after the contract is purchased. Immediate annuities commonly begin within a month of purchase.
A deferred annuity is a contract purchased from an insurance company that promises to begin payouts on a specified date in the future. There are a few different types of deferred annuities – fixed, indexed, and variable. Each promises a certain rate of return which depends on the performance of a particular market index. Returns grow on a tax-deferred basis.
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Originally published October 12, 2022