An annuity is a retirement investment vehicle that distributes money earned on a set schedule. In most cases, annuities are used by retirees who are worried about outliving their money. With one of these, you know for sure that you are going to receive a set income until the day you die.
Annuities can be purchased through many insurance companies. With the money you contribute you are guaranteed a future income. The more money you put into an annuity the more you will get back out, based on your payment schedule.
Earnings within an annuity are tax deferred until the money is withdrawn. Most of the time, money is withdrawn after retiring.
There are many reasons to consider an annuity:
- Allows you to receive an income for as long as you live.
- Great way to diversify your investments.
- Can add a death benefit as a way of leaving something behind.
- Allows you to grow your money, tax deferred.
If these benefits are of interest to you, buying an annuity in the near future may be a good idea. Before you get ahead of yourself, keep in mind that there are several types of annuities. They include:
Immediate annuities. Features include several distribution options, regular payments, and many contract choices.
Variable annuities. Features include tax deferred growth, death benefit, benefits to spouse, and the ability to access account value funds without being penalized.
Before you make a final decision, ask yourself the following questions:
- What type of annuity (listed above) is right for me?
- Why am I buying an annuity? Is it for retirement?
- What type of fees will you have to pay in association with the annuity?
- How is this going to affect your tax situation now and in the future?
- What happens to the annuity upon my death?
Once you answer the above questions you should have a better idea of what goes into buying an annuity, and whether or not you are ready to make a purchase right now.
Those who do not have a lot of money or fear that they will outlive their savings should consider an annuity. Even if you outlive the principal you are going to receive a steady income.
With this information you should have a better understanding of what an annuity is, how it works, and the pros and cons of this type of investment.