The first thing anyone is going to ask when they first get introduced into this world of investments is “What is an annuity?” Jumping into the workforce will cause you to come face-to-face with a lot of technical jargon that you most likely have never encountered before. And that’s okay. It happens to everyone, and that’s what we are here for… to clear up the confusion!
An annuity is essentially, to keep things very basic, an insurance policy. It is a product that is an investment, and when paid into, you begin stock piling money with the opportunity to make interest back. It is usually used as a piece of a retirement plan. The annuity is a strategic tool for those who want to be paid a regular “pay check” of sorts in retirement. It allows a steady and consistent stream of income in retirement.
What is an Annuity and How Does it Work?
So we’ve answered, “What is an annuity?” Not so bad, huh? The next question that inevitably arises is the question, “How does an annuity work?” Let’s make this very simple for the first time around.
You begin working and decide you want to start considering retirement. So you start making an investment into an annuity. You keep paying into it, and hopefully your company you work for matches you on the dollar or half dollar. You make some extra money out of it with the interest rates, and eventually you retire. Now, the annuity begins making payments to you instead!
It’s to you to choose when and how you get paid out of your annuity. You can receive a monthly payment, quarterly, and even an annual payment. You’ll pay more in taxes, but you can even receive a lump sum payment and withdraw all of your money at once. The amount of your payment will be dependent upon the payment periods you have chosen.
The Types of Annuities
When you choose your payment periods, you have options. You can get paid out for the rest of your lifetime, or you can receive payments for a specified amount of years. The amount of your payment will be directly related to the type of annuity you have chosen. You can get a guaranteed payout if you have chosen a fixed annuity, or you get can get a stream of payouts based on how well the investments the annuity company makes performs. This is called a variable annuity. These are the types of annuities.
Any of these annuities are decent choices for a retirement plan, but they can also be detrimental for some people who aren’t able to manage their month-to-month expenses. This will be disastrous in retirement. Planning responsibly means also learning and researching annuities thoroughly before jumping into any decision about an annuity.