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Successful financial planning into retirement is the result of understanding your options, and then making informed decisions. One of the options available to you as you plan for long-term financial health is an annuity. Investing in an annuity may help reduce the risk of outliving your income.
What Exactly is an Annuity?
An annuity is insurance that pays out income that you can use as part of your retirement plan. When you invest in an annuity, you create a strategy to receive a guaranteed income stream in the future.
Whether you receive payments every month, yearly or in one lump sum is up to you. How much each payment is depends on the length of time you arrange to receive payments and whether you choose a fixed sum payout (fixed annuity) or an annuity that’s tied to the performance of the market (variable annuity).
The two main types of Annuities are Deferred and Immediate.
Deferred annuity. With a deferred annuity, you invest for a pre-determined amount of time, until you are ready to start taking withdrawals in retirement.
Immediate annuity. With an immediate annuity you have the option to start receiving payments immediately, after your first initial investment. Seniors who are close to retirement age often decide to purchase an immediate annuity.
Both deferred and immediate annuities can be fixed or variable. With fixed rate annuities, underlying investments are chosen for you and you are paid a pre-determined fixed-rate return. With a variable annuity, you make the decisions about how to invest your money, with payouts determined by the performance of the mutual funds you choose.
When you decide to cash out an annuity, you can either take a lump-sum payment or set up guaranteed payments for a specific amount of time or for the rest of your life, providing a guaranteed, steady income stream.
Is an Annuity Right for You?
The main benefit of investing in an annuity is that it allows you to put away a significant amount of cash for retirement, tax-free. Unlike other tax-deferred plans, like the 401k or IRA, annuities do not have annual contribution limits. If you are nearing retirement age, and need a secure way to catch up with savings, an annuity is a smart choice in that your money truly works for you.
However, there are things to consider when deciding if an annuity is right for you. Money invested is tax free, but there can be hefty fees and penalty charges for early withdrawal that can put a damper on your investment strategy.
When you are ready to learn if an annuity is the right addition to your retirement strategy, we can help.