Whether you plan to retire in four years or forty, making sure your nest egg will provide you with security for the rest of your life is a concern for any investor. One powerful tool to help you prepare is an annuity.
An annuity is a contract between you and an insurance company. When you purchase an annuity, you make a lump-sum contribution or a series of contributions, generally each month. In return, the insurance company makes periodic payments to you beginning immediately or at a pre-determined date in the future. These periodic payments may last for a finite period, such as 20 years, or an indefinite period, such as until both you and your spouse are deceased. Annuities may also include a death benefit that will pay your beneficiary a specified minimum amount, such as the total amount of your contributions.
The growth of earnings in your annuity is typically tax-deferred; this could be beneficial as you may be in a lower tax bracket when you begin taking distributions from the annuity. A word of caution: Annuities are intended as long-term investments. If you withdraw your money early from an annuity, you may pay substantial surrender charges to the insurance company as well as tax penalties to the IRS and state.
There are three basic types of annuities — fixed, indexed, and variable.
With a fixed annuity, the insurance company agrees to pay you no less than a specified (fixed) rate of interest during the time that your account is growing. The insurance company also agrees that the periodic payments will be a specified (fixed) amount per dollar in your account.
With an indexed annuity, your return is based on changes in an index, such as the S&P. Indexed annuity contracts also state that the contract value will be no less than a specified minimum, regardless of index performance.
A variable annuity allows you to choose from among a range of different investment options, typically mutual funds. The rate of return and the amount of the periodic payments you eventually receive will vary depending on the performance of the investment options you select. You can learn more about variable annuities by reading the SEC’s publication, Variable Annuities: What You Should Know
Whether your financial plan includes a fixed, indexed, or variable annuity, 1DB can help you select one that meets your objectives.