Could You Benefit from an Annuity?

By | September 12, 2012

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If you haven’t begun to save for your retirement, there’s no time to get started like the present. No matter your age, saving for your retirement is essential as Americans can no longer reliably depend on Social Security. You have several choices when it comes to building your retirement account. One of those choices is putting money into an annuity. Here’s what you should know about these financial products:

1.What is an Annuity?

An annuity is a lump sum of money that you put into a specialized account, structured according to your wishes. These financial products are particularly popular among people of all ages who want a guaranteed stream of income upon their retirement. You can invest your money in a deferred annuity or an immediate one, and opt for fixed or variable payments.


There are several advantages to annuities when compared to other retirement funding options. Annuities, like IRAs and 401(k)s are tax-deferred but unlike these investment accounts, there is no maximum annual contribution limit. This means that you can invest as much money into your annuity account as you choose. The money that you invest compounds yearly and taxes aren’t required until you begin receiving payouts.


Before you decide to invest your money in an annuity account, there are disadvantages that you should be aware of. Annuities are typically sold by brokers that collect a commission, there are surrender charges to be paid if you take cash out before your annuity has matured, and there are annual insurance charges for variable annuities. If you choose to close your annuity account before you reach the age of 59 ½, you’ll be hit with a ten percent penalty in addition to the taxes that must be paid.

4.Investment Options

There are two types of annuities that you can choose from: fixed-rate and variable. If you opt for a fixed-rate annuity, your insurance company will decide how and where to invest your money. If you choose a variable annuity, you will decide which mutual funds to invest in. Variable annuities are typically more expensive in the long run, with the average person realizing a smaller return on their investment than those who have chosen a fixed-rate annuity.


When you invest money in an annuity account, you will be asked to select how your monies will be returned to you when the time comes. When you retire, you can choose to have your payments sent for a guaranteed period, for your lifetime, income for life with payments going to your survivor for a predetermined amount of time should you die, or joint and survivor annuity. The payout options make it easy to tailor your annuity to your unique plans for supporting yourself after retirement.

Annuities can be a sound addition to a retirement plan, but should not be your only source of post-employment income. If you decide to put a chunk of money into an annuity, make sure that you shop around for the best rates. You don’t want to see the returns on your investment eaten up by brokerage fees, commissions and insurance charges.

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