Are you worried about retirement? Are you unsure about the best investment for your future?
Annuities are one of the safest retirement strategies. How does an annuity work?
An annuity comes in the form of monthly payments from an insurance company. You make monthly payments, and the insurance company will grow the money.
From there, the insurance company will give you a monthly sum when you retire. However, annuities come in different forms, and some are riskier than others.
This article will highlight how annuities work in greater detail. Let’s explore.
Assessing Your Options
When paying for an annuity plan, you have the option of monthly payments or a single payment. The best option depends on your situation.
If you have a large sum of money (i.e. inheritance or savings), consider the single payment option. Conversely, choose the monthly option if you have less cash upfront.
When it comes to payment methods, choose from one of the following:
- Deferred Annuity: You’ll receive your money in the future (i.e. when you retire).
- Immediate Annuity: You’ll receive your money right away.
If you choose the deferred option, you shouldn’t withdraw money before turning 59. Otherwise, you’ll receive a 10% penalty.
You can also choose a lifetime annuity or a fixed-period annuity. The lifetime annuity plan is guaranteed for life. The fixed period plan will last for a predetermined number of years. The limited annuity period can range from 5 to 25 years.
Different Types of Annuities
The main types of annuities include fixed, variable, and fixed indexed. The fixed option is the most reliable because it comes with a set interest rate. The rate will only change based on contract stipulations.
- Example: The agreement could mention the rate could change after a certain number of years.
Fixed annuities offer a steady income. You’ll also benefit from the lower risk. Due to the lower risk, however, you’ll receive a lower return.
If you’re looking for higher gains, consider the variable alternative. This annuity comes with a fluctuating interest rate that’s tied to a portfolio. If the portfolio does well, your annuity will grow. If the portfolio performs poorly, your monthly income will suffer.
If you’re looking for medium risk, choose fixed indexed annuities. It offers a lower risk compared to variable annuities.
Plus, it provides higher income opportunities than fixed annuities. Additionally, the interest rate won’t sink below a certain amount.
At the same time, fixed indexed annuities depend on the performance of the stock market. Further, they come with higher fees. The calculation methods are also cumbersome.
To get more cash out of your annuities, you can learn more about the process by contacting a financial service company.
How Does an Annuity Work Overall?
If you’re wondering, “How does an annuity work?”, it’s designed to give you a monthly cushion when you retire. If you want the safe option, choose a fixed annuity plan. If you want more risk, choose a variable plan.
Interested in learning more? Read more on our blog to gain insight into other financial topics.
