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Preparing for Your Retirement: The Beginner's Guide to Annuities

Annuities are a great way to create a steady, reliable income stream. They offer the potential for lifetime income, and can provide tax-deferred growth.

Susan Cahill

Approximately 50% of Americans are currently struggling with their retirement finances. With nearly 10,000 people turning 65 each day for the next two decades, that represents an avalanche of gray-haired unease, according to a Forbes study in 2020. Stay on the right side of the 50% by following these tips and tricks for future success.

Annuities are a great way to create a steady, reliable income stream. They offer the potential for lifetime income, and can provide tax-deferred growth. Annuities, however, are not without their challenges, as well. There's a lot of confusing information out there about annuity rates and features. If you've ever wondered what exactly an annuity is or how it works, we’ve created this beginner's guide to help you make an informed decision about whether it’s right for you!

1. What is an Annuity?

Annuities are contracts sold by financial institutions or insurance companies through monthly pension payouts that come later on in life. Funds are invested with the goal of paying out a fixed income stream later on. Their goal is to help individuals restrain from the risk of outliving their savings. Ultimately, they allow you to invest money now to receive future payments.

Annuity payments can be distributed monthly, quarterly or yearly, and some annuities even offer lump-sum payouts. Distributing your annuity payment in a specific time frame has many benefits that you should consider before making the final decision on how to receive your funds.

2. Why Should I Buy One?

The top reason why you should buy an annuity is that it ensures your retirement is secured. Many people are starting to live longer, but with the rising costs of healthcare, you never know what might happen.

This annuity contract will provide the funds for you to live off during your retirement years without having to worry about how much money you have or running out too soon.

The payments from an annuity can be deposited into various accounts like stocks, bonds, and mutual funds that help secure future earnings when someone retires in his 60s or 70s rather than waiting until they're 80+ years old. Annuities also let retirees take minimum distributions if they want, which helps keep more money invested because Social Security income is taxable.

Photo by Austin Distel on Unsplash

3. When Should I Buy One?

The best time to buy an annuity is when you're young.

The younger the person, the more they can expect in return because of their longer life expectancy. You will likely have fewer expenses when you're young, which means you'll need less money. With excess money, the best thing to do would be to diversify your income streams. While an investment in annuities may take longer to start receiving payouts, it will still grow significantly by the time you retire and eventually become a reliable income stream.

4. Types of Annuities

Annuities are classified into two main types: fixed and variable.

You can get an annuity with either fixed or variable payments, but you should know the pros and cons of both options before investing in one.

Fixed annuities provide regular periodic cash flow that will be very stable over time because it won't fluctuate based on how well your investments are doing. They'll only pay out what was agreed upon from the start when choosing this option.

Variable Annuities have more risk involved if their funds do poorly since there is less guarantee for these future returns than other types of pensions. However, thanks to its structure as an investment tool, investors can reap higher benefits if things go well, albeit at more significant risk.

Photo by Matthew Guay on Unsplash

5. How to Purchase an Annuity?

Once you understand how an annuity works, the next step is to purchase from an annuity provider. This can be done in a couple of ways:

You can call up your provider, which might look something like this: "Hello! I want to purchase an annuity from ABC Insurance Company."  It is important to note that if you are purchasing multiple annuities at once, it may not be possible for them all to go through over the phone. But your agent will help walk you through what steps they need and any additional pieces of information required on their end.

If you have a laptop, you could go through the process to buy annuities online. They will have the steps to follow as long as you have all the necessary information with you.

6. Advantages of Annuities

An annuity is an investment that allows you to accumulate more funds without any tax implications. Unlike other contracts, there are no limits on the amount of money you can invest in your agreement. Additionally, it grows over time with interest while avoiding taxes until withdrawal or its maturity date, which makes this a great retirement plan for anyone who needs to catch up before they retire!

The most significant advantage of investing in an Annuity is how much capital we can save towards our goals without paying taxes. These savings can be easily calculated online to show how much money you will save after a given period. This gives us peace of mind knowing all our investments will be working hard for us throughout the years. Many people stop saving altogether once their income reaches certain levels. Little do they know, if appropriately invested, these savings could make them rich.

Lastly, if you pass away before receiving your payouts, you don’t need to worry. Due to its death benefits, the individual you have as your beneficiary will receive the funds and be able to use it for your family.

Conclusion

In the end, annuities can be an excellent investment. Prices vary by the age of purchase, amount purchased, length of the payout period, etc. It's essential to research these details before deciding to get the best deal possible. We hope this article has helped you better understand how an annuity works, and we encourage you to learn more about them so that you can make an informed decision when it comes time for your retirement savings strategy.

Personal Finance