In the United States, a staggering one in four Americans say they have nothing saved for retirement. If you’re looking at an annuity investment to help make sure you’re not a statistic, you’ve come to the right place. From what they are to how they work, we’ve rounded up everything you need to know about annuity investments and retirement planning.
What is an Annuity?
An annuity is a form of insurance that’s paid out as a fixed stream of income at a later date. This date typically falls during retirement. To start, an individual invests in an annuity paying through monthly payments or a lump sum. During retirement, these payments are then paid out as income.
An annuity is often used by retirees as a form of insurance that they’ll have enough money during retirement. With life spans getting longer an annuity may help bridge the gap from other income sources during retirement.
How Annuities Work
An annuity is a financial tool that guarantees a stream of income during retirement. The first stage of the annuity process is the accumulation phase. During this phase, you’re making periodic or lump sum payments into your annuity. After a period of time known as the annuitization period, you begin receiving fixed payments.
You can structure an annuity into two different kinds of instruments. This gives you a lot more flexibility. The two options are immediate or deferred annuities that can be structured as variable or fixed. The idea behind an annuity is that it acts as a form of insurance for the retiree that they’ll have an income stream separate from their assets.
If you want to maintain a certain standard of living, your assets may not be enough to cover you for the rest of your life. With an annuity, you are guaranteed fixed income payments in your retirement.
Is an Annuity a Good Investment?
An annuity is a great investment for retirees looking to receive fixed income payments after they stop working. While you typically have other investments, assets, and Social Security payments, this isn’t always enough. An annuity isn’t for younger adults looking for more liquid investments.
If you withdrawal from your annuity in your 40s, for example, there are fines and tax penalties associated with this. Annuities are only meant for retired individuals. This doesn’t make it a great investment for those looking to cash out on a liquid asset over a short period of time.
As with most retirement investments, an annuity is meant for the long haul. During the first accumulation phase, you’re solely funding your investment. Any money invested during this period will grow on a tax-deferred basis.
The annuitization phase will kick in when your payments commence. This is the payout period that starts during your retirement years. For a retiree on a fixed income, an annuity is a great opportunity to fill in any gaps left by your assets or other income streams.
Types of Annuity Investments
Annuities come in a variety of ranges. There are several different variants between different annuity structures. For example, let’s say you have a spouse who outlives you. You can structure your annuity so that the payments continue for them after you’ve passed.
You can also use an annuity for a fixed period of time. Let’s say you want your payments to come in over a 20-year period. After 20 years, your payments end regardless of how long you live. An immediate annuity is one in which payments start right after you deposit a lump sum.
A deferred annuity is one in which payments start after the accumulation phase. You can also structure your annuity plan to start at a set age. With either option, you can have a fixed or variable annuity.
A fixed annuity provides regular fixed payments. A variable annuity allows you to use variants in the stock market to determine your payments. While this comes with more risk, if the stock market is performing well, you’ll see larger payments. This allows you to receive more returns from your investments if they perform well.
Is an Annuity Investment Right for You?
An annuity can be a great way to make sure you have enough income to live during retirement. With living expenses, potential health care costs, and all the other expenses that come your way later in life, it’s important to make sure you and your spouse or partner are covered.
While Social Security, your assets, and other investments are great, will they be enough? Consider how much you’d like to live off of when you retire. Many people follow the 80% rule. This means you’ll need about 80% of your current income to live during retirement.
If you feel like your assets may not be enough, an annuity could be just what you need. Think of your annuity as a safety net providing you income when you need it.
Get Started with Your Annuity Investment Today
If you’re interested in learning more about annuities, you’ve come to the right place. We can help you find an annuity action plan that fits your retirement needs. When you’re no longer working, you want to make sure you have enough assets and income coming in to live comfortably.
You shouldn’t have to worry about paying for living expenses and medical care later in life. Let an annuity help fill in any income gaps. To learn more, fill out the contact form here. You’ll be put in touch with a retirement expert who can help make sure you’re covered.