Annuities are a type of investment account typically used for retirement savings or to generate regular income payments in retirement. Annuities are basically insurance contracts where the issuing insurance company provides some type of guarantee on your investment.
Annuities were originally designed to be a reliable means of securing a steady cash flow for an individual during their retirement years to alleviate their fears of outliving their assets. There are many types of annuities and many retirement savings strategies that ensure that you will not run out of money in retirement that do not involve annuity investments. The ideal retirement investment strategy for you depends on your unique situation and your financial goals.
An annuity is a tax-deferred investment contract. The details on how it works vary, but the normal process is that you invest your money, either a lump sum or a series of contributions, with a life insurance company that sells annuities.
The period when you are funding the annuity is known as the ‘accumulation phase.’ In exchange for your investment, the annuity issuer promises to make payments to you or a named beneficiary at some point in the future. The period when you are receiving payments from the annuity is known as the ‘distribution phase.’ Typically, you start receiving payments after you retire.
If you are looking for income in retirement or are still saving for your retirement, check with a financial advisor to determine what retirement savings strategy is best for your particular financial situation. If you and your financial advisor determine that an annuity is the best option for your portfolio, you have several types of annuities to consider:
Income annuities – Income annuities can provide a stable and secure source of retirement income. With these types of annuities, you surrender future access to a portion of your savings in exchange for a stream of income that’s guaranteed for life. Payments from income annuities can typically start as early as thirty days from the day you sign the contract.
A deferred variable annuity (with a lifetime withdrawal benefit) – Deferred variable annuities with lifetime withdrawal benefits offer a way to safely draw down your retirement assets by guaranteeing that, at a minimum, you will be able to withdraw a set percentage of your savings for the rest of your life. You retain access to your savings throughout the life of the annuity, and since the money is invested in a portfolio of stock and bonds, you have the opportunity to grow both your principal and your income stream gradually over time.
Deferred annuities – Deferred annuities’ investments grows tax-deferred, so you won’t owe taxes on your earnings until they’re withdrawn. Depending on the annuity, you can invest in portfolios covering all the major asset classes; giving you a chance at long-term growth. You also have the option to lock in a specific interest rate so that you know exactly what you’ll earn.
In addition to the below items, check with a qualified financial advisor to help you with your annuities’ investment.
Annuities, like any investment, come with pros and cons. Consider the benefits and drawbacks of annuities before adding an annuity to your retirement portfolio.
Annuities aren’t for everyone and should be considered on a case-by-case basis. Here are some potential drawbacks.
Every investment portfolio is unique for what makes financial sense for an individual’s specific situation. A financial advisor can help you determine whether annuities are an investment that makes sense for you.
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