Investing in Annuities | Income Streams for Retirement

There are many ways to build income streams, for your life now or for your future retirement. It is important to explore all your options before you make your choice, and investing in annuities might be one to consider, especially if you have reached the maximum limit for your ROTH IRA or 401(k). But take the time to educate yourself and seek advice from a financial professional as to what annuity, if any, is right for you.

What is an annuity?

An annuity is a financial vehicle that is backed by an insurance company, in which the investor makes a lump-sum payment or a series of payments, with the intention of receiving a guaranteed, fixed income stream in the future. Most annuities are used for retirement purposes, and unlike a 401(k), an annuity doesn’t have a contribution limit. 

It is important to note that there are different types of annuities, and every investor should do their research before making any investment purchase. 

What are the different types of annuities?

There are four basic types of annuities: Immediate, Deferred, Fixed and Variable. 

Immediate Annuities

Immediate annuities are designed, as the name suggests, to start making payouts immediately, for the rest of your lifetime. They can have additional features, like having the fees woven into the payout or an optional death benefit in which your payments are sent to another person or entity. 

Deferred Annuities

Deferred annuities give a guaranteed stream of income at a future date. This can potentially give the option to grow the principle before the payout. Deferred annuities have no contribution limits and are not taxed until you take the money out. 

Fixed Annuities

Fixed annuities pay a fixed interest rate for the term agreed upon for the investment. When the term is complete, the investment can be paid out or invested into another annuity contract. 

Variable Annuities

A variable annuity allows you to invest your money into sub-accounts that can help the annuity’s growth. Similar to mutual funds, the performance in these sub-accounts depend on the market and its fluctuations. 

What are the annuity phases?

An annuity has two phases, the accumulation phase and the annuitization phase.

The accumulation phase is the time period of paying into the annuity. During this time, the invested money grows on a tax-deferred basis, until the specified date when the guaranteed payments start. 

The annuitization phase is when the investor starts receiving the regular payments. 

What are the pros and cons of annuities?

Like any investment, there are pros and cons that you need to be aware of. Again, it is important to do your own research to make sure you make the best decision you can for your financial stage of life. 

Pros

• They provide a reliable and steady stream of income, usually for retirement.
• Funds accrue on a tax deferred basis.
• They can be tailored to the specific needs of the buyer.
• The insurance company must continue to make regular payments until the annuitant is deceased. 

Cons 

• Annuities have a surrender period, and during that time, the investor cannot make withdrawals without paying a fee. 
• Even if the surrender period has passed an investor may have to pay fees to withdraw more than 10% of their funds. 
• Payment terms and interest rates vary and depend on the duration of the annuity.
• Some annuity contracts have an income rider that can have fees associated with them.
• Some annuities charge excessive fees. (Including annual administration and maintenance fees, as well as commissions paid to the adviser who sells you the annuity)

When considering an annuity make sure to ask questions.  Some questions you will want to ask:

• What type of annuity is best for me in my situation?
• Are there fees?
• Are there surrender charges?
• What is the rating of this annuity?
• How much can I withdraw penalty-free?
• Is there a Market Value Adjustment (MVA)?
• What riders are available and what do they cost?
• What is the term and what happens when I die?
• How long is the rate guaranteed?

To make sure you have enough money to live comfortably when you retire, making investments into assets that pay you consistently is a must. This is one of the reasons why an annuity might be a good option for you. 

If you are exploring your options and want more information, CLICK HERE to read Wealth: Assets and Liabilities | Personal Finance Insights Everyone Needs.