What is an annuity
This is a more complicated question than one might realize. So what is an annuity? The standard definition from the dictionary is listed below but it does not really help to answer the question.
a fixed sum of money paid to someone each year, typically for the rest of their life.“he left her an annuity of $1,000 in his will”
a form of insurance or investment entitling the investor to a series of annual sums.“an annuity plan”
Answer to “What is an annuity”.
Annuities are a type of investment account typically used for retirement savings, conservative account growth or to generate regular income payments in retirement. Annuities are insurance contracts, and the issuing insurance company provides basic guarantees in the contract depending on the type of annuity.
There are many types of annuities, and the right one for each person depends on their situation and goals.
Looking for guaranteed income in retirement
Consider income annuities or annuities with guaranteed income riders: Income annuities can provide a stable and predictable source of retirement income. With these types of annuities, you surrender access to a lump sum of money in exchange for a stream of income that’s guaranteed for life. Payments from income annuities can start as early as 30 days from the day you sign the contract but the more competitive income annuities require a much longer gestation period ranging all the way up to age 85.
Fixed or Variable Annuity with guaranteed income rider: The majority of annuities on the market today offer a guaranteed income riders. Riders will provide a set amount of income at a future date determined by the insured. Income riders are predictable and can be illustrated to show how much guaranteed income would be paid out for life at any given start date. Most income riders have an annual fee that is deducted from the overall account value of the annuity. Some income riders will increase the benefit base (number used to determine the income payout) on a guaranteed annual basis. Past income rider could be found with 8% to 10% compound roll ups for 20, 30 or sometimes 40 years. The current interest rate environment has lowered the guarantees in most products income riders over the past few years.
Trying to conservatively grow your nest egg.
Consider a Variable annuity or fixed indexed annuity for safe growth. Most growth oriented annuities will provide minimum growth guarantees and also have lock in features which set a new minimum value every year. Some Variable annuities can go below your initial value if the market based accounts they use have negative returns.
What should I think about when looking at annuities?
Understanding the basics of an annuity is one thing. The bigger step is knowing the details and understanding which annuity is best for your situation.
- What the fees and charges will be. Fees and charges vary greatly from company to company and also depends on the type of annuity.
- Who issues the annuity. Annuities are backed by the strength of the company offering them. Take a look at the financial rating of the company you use.
- How you want your annuity invested. You can go with a fixed annuity (called a MYGA), an indexed annuity or variable annuity. In general the fixed annuity is a set fixed rate but will often have a lower yield. The fixed indexed annuity will have potential for more growth but can also do little to nothing in bad years. A variable annuity can grow substantially or have negative returns depending on market performance.
- How much flexibility you need. Annuities have surrender periods. They range from 3 years to 15 years depending on product and state. Choose one that fits your needs.