Annuities are financial products typically offered by insurance companies. They provide a steady stream of income payments over a specified period, often for the rest of the annuitant’s life. They are commonly used as a retirement income tool. People use them to supplement other sources of retirement income, such as pensions, Social Security, and personal savings. Here are annuities explained.
Income Stream
They offer a guaranteed income stream, either for a set period (fixed-term annuity) or for the annuitant’s lifetime (lifetime or longevity annuity). This provides financial security and helps individuals plan for their retirement needs.
Annuities Explained – Payment Options
Annuities are a product one can structure to provide payments in various ways, including the following.
Immediate: Payments start soon after the initial investment or purchase.
Deferred: Payments are deferred until a future date that the annuitant chooses. This allows for accumulation of funds and potential growth.
Fixed: Payments set themselves at a predetermined amount. They do not fluctuate based on market performance.
Variable: Payments fluctuate based on the performance of underlying investment options. These typically are mutual funds.
Tax Advantages
They may also offer tax-deferred growth. This means that earnings within the annuity accumulate tax-free until withdrawals are made. However, withdrawals are generally subject to ordinary income tax and may incur penalties if taken before age 59½.
Fees and Expenses
The product may come with various fees and expenses, including administrative fees, mortality and expense fees, and investment management fees (for variable annuities). It’s essential for investors to understand and evaluate these costs before purchasing an annuity.
Death Benefits
Many annuities offer death benefits that allow beneficiaries to receive a portion of the annuitant’s account value or remaining payments upon the annuitant’s death, depending on the annuity’s terms and conditions.
Guarantees
Some annuities come with optional riders or features that provide additional guarantees, such as minimum income levels, protection against market downturns, or inflation adjustments.
Liquidity
Annuities typically have limited liquidity, meaning that withdrawals may be subject to surrender charges or penalties, especially during the early years of the contract. However, some annuities offer liquidity options that allow for penalty-free withdrawals under certain circumstances.
Conclusion
Overall, annuities can be valuable retirement planning tools for individuals seeking a steady income stream and protection against longevity risk. However, it’s essential to carefully evaluate the terms, fees, and features of any annuity product to ensure it aligns with your financial goals and needs. Consulting with a financial advisor can help you determine whether an annuity is a suitable option for your retirement strategy.
