Annuities are periodic payments paid to you, usually on a monthly basis and often for life. They can be left to your loved one in the event of your death. Once fully funded, the annuity pays a set amount each month for either the life of the contract or your life. The remaining funds can be left to your spouse, child, or other loved one in a lump sum or a monthly payment. There are four types of annuities you need to know about.
This type of annuity is usually used by someone who is already in retirement, getting ready to retire, or just came into a windfall such as an inheritance or lottery and they want to protect their money while providing an income for themselves each month.
An immediate annuity needs a large investment to be beneficial. The average age someone buys this type of annuity is usually between 65 and 70 years old. If you had a million dollars cash laying around and you put it into this type of annuity, you would immediately start collecting monthly payments that would total about $65,000 a year for 20 years (or life depending on the type you purchase). You’d earn your principal back in about 15 years.
Deferred Income Annuity
This type of annuity can be had for as little as $5,000 to $10,000. Then you can add to it every month until you retire. The calculations for payments are made based on the input you promise to send and your initial investment, plus interest, subtracting fees, and other costs.
Many people who have maxed out their 401K and IRA contributions, plus already have plenty of access to other cash for emergencies, like to purchase this type of annuity to ensure a set monthly payment for their retirement years to offset risks from other investments.
The returns increase in value based on a set interest rate that is known at the time of the purchase. Usually, this is the type of annuity you get when you set up a deferred income annuity. They have better interest rates than CDs (certificates of deposit), and all the interest you earn is tax-deferred until you start receiving payments.
Normally, you don’t have to choose your exact payment dates until closer to your retirement. At that time, they will work out the payments that you’ll receive after you stop paying into the fund. However, you will have an idea of what you’ll get based on interest rates, the payments you pay in monthly, plus when you start taking payments.
This type of annuity’s interest rate is tied to another fund, such as the S&P 500. It’s a lot riskier, but you can end up with more returns and still get some protecting regarding your principal. Your income is still tax-deferred, and you still have a minimum monthly guarantee. In some cases, you can also take some cash, and you can assign a death benefit to your relatives.
Now that you know this information about the four different types of annuities, do you think they are good financial options for your retirement income? The ability to put money away in a safe place while also collecting a monthly income is special, because most financial products don’t offer this facility. There are more types of annuities than these four, but these are the main ones. Each institution has different plans and combinations of choices.