Annuities are part of an insurance plan that is often used as part of a retirement plan. Basically, an investment is made into the annuity which then pays out monthly, quarterly, yearly or in a lump sum at a future date.
Annuities often require large investments and while they can greatly add to retirement planning, they can also be disastrous due to their high investment. Before deciding on an annuity, all options should be carefully considered and thoroughly investigated before making any investment.
Different Types of Annuities
The two main types of annuities are the deferred annuity and the immediate annuity. Deferred annuities are designed to accumulate money over a period of time while immediate annuities are designed to begin paying out right away. Both deferred and immediate annuities can either be fixed or variable depending on payout, performance and investment options.
Deferred Annuity
With a deferred annuity, money is invested over a longer period of time where it accumulates until the investor is ready to start withdrawing on it. Typically, investments are made and allowed to accumulate until retirement. At any time, a deferred annuity can be switched over to an immediate annuity.
Immediate Annuity
Immediate annuities are sometimes called income or payout annuities. As the name implies, they are designed to begin payout soon after making the initial investment. This option is often chosen by people who are already in retirement. Payouts can be set up to receive payments for a specified amount of time, or until the death of the investor or their spouse.
Fixed Annuity
Fixed annuities pay guaranteed rates of interest and can be deferred or immediate. Deferred fixed annuities will collect regular rates of interest while immediate fixed annuities make fixed payments during retirement. Fixed annuities often have lower investment premiums and pays guaranteed rates of interest.
A fixed immediate annuity will guarantee a fixed payment for life, or a specified number of years. The amount of payment will not change. This type of annuity can help provide a consistent, dependable income stream.
Variable Annuity
Variable annuities are allow a person to choose from many different investment options. Payouts in retirement are determined by the success and performance of the chosen investments. This type of annuity allows for several investments to be made and has the potential for long-term capital growth.
The risks of variable annuities often outweigh the advantages. If the chosen investment declines, the annuity also declines resulting in a lower payout. Additionally, variable annuities have tax penalties for those under the age of 59 and long term capital gains become taxed at ordinary income rates upon withdrawal.
Variable annuities are subject to surrender charges for early withdrawal and a sales commission fees up to 4%. Additionally, variable annuities can incur management and insurance fees ranging from 2% to 3%. These fees are reduced from the amount of annuity payment.
References and Resources:
CNNMoney.com
Malysa Stratton Louk - Malysa Stratton Louk is a freelance writer, journalist & photographer in the Pacific Northwest. View her full profile for more ...
Join the Conversation