There are a lot of things to consider when planning for retirement, and understanding annuities is crucial. Here’s a basic guide to help you grasp their benefits.
Annuities are financial products sold by institutions to help individuals grow their funds. Upon annuitization, they provide a steady stream of payments to the investor at a later time, which helps retirees maintain a stable cash flow. There are different types of annuities to know about:
1. **Immediate Annuities:**
– These start paying you right after you invest your money. They are ideal for those who need income right away. You can choose to receive payments for a specific period, for life, or a mix of both.
2. **Deferred Annuities:**
– Payments begin at a future date, typically at retirement. You can start receiving withdrawals 30 days after purchasing your annuity. Investments can be made as a lump sum or through periodic payments, either fixed or variable.
3. **Fixed Annuities:**
– These are invested in government securities and high-grade corporate bonds, offering a guaranteed return over a term of one to fifteen years. There are two types:
– Guaranteed Return Annuities (GRA) ensure you never receive less than 100% of your investment.
– Market Value Adjustment (MVA) annuities are similar but don’t guarantee your principal if rates rise and you need to surrender your contract.
4. **Variable Annuities:**
– Here, you give the issuer principal, and they guarantee variable payments over time, typically for one to ten years. They have several features:
– Investments grow tax-deferred until withdrawn.
– A wide range of investment options allows you to benefit from stock market gains. You can switch among sub-accounts with no charge.
– Optional living and death benefits, including features like the Guaranteed Minimum Income Benefit, which guarantees at least a 5% return over seven years.
– Death benefits ensure that your total invested premiums are paid to your beneficiaries upon your death, though this comes with additional costs.
The key difference between fixed and variable annuities lies in risk and return. Fixed annuities offer guaranteed returns, while variable annuities’ returns depend on market performance, carrying a higher risk but also the potential for higher rewards.
This guide touches on the basics of annuities. It’s important to do thorough research before deciding which type of annuity fits your financial needs and lifestyle.
