An annuity is a contract between you and an insurance company that requires the insurer to make payments to you, either immediately or in the future. You will buy an annuity by either making a single lump sum payment to the insurance company or a series of payments to them over time. An annuity provides you with a predictable stream of income in retirement. Those benefits include:

Predictable payments – These payments may be guaranteed for a set period or the end of your life, the life of a spouse or another beneficiary;
Tax-deferred growth – Money paid into an annuity grows on a tax-deferred basis. When you receive annuity payments, the earnings of your payments are taxed as ordinary income, while the principal is normally tax free.
Death benefits – Depending on the annuity type chosen, your beneficiary can receive benefits after your death.

The period that you are contributing into your annuity is called the accumulation phase. In exchange for payments during the accumulation period, the company promises to make regular income payments to you in the future. The period that you start collecting payments from an annuity is called the distribution phase. You choose when you want the payments to begin and how long you want them to last.

Deferred Annuity vs. Immediate Annuity

As the names above suggest, these are the two types of annuities you are looking for. A deferred annuity is one that you wait a year or longer to start receiving payments on. An immediate annuity is one where you start receiving payments within a year of the purchase of it. Obviously, the longer you wait, the bigger your expected payout will be.

Three Types of Annuities: Fixed, Variable and Indexed

When talking about annuities, there are three types, fixed, variable and indexed.

Fixed – pays you a guaranteed annual minimum, ensuring you receive a baseline of income from the contract each year. It does not depend directly on the market. Safest.

Variable – income depends on market performance. You choose investments (usually mutual funds, stocks, bonds), the amount of money paid to you is based on how these investments do after fees are paid. Risky.

Indexed – income depends on market index like S&P 500. Annual return is calculated over a specific time period, usually a year. If the index gains value, then your annuity gains. If the index loses, so too does your annuity. There is a risk for volatility, but gains and losses are capped.

There can also be other fees associated with an annuity. Such as, Lifetime income rider, a COLA rider, etc. These fees can add up. There are also fees for purchasing the annuity. You may not see all of these fees.

As Coach Pete says, all these termites can eat away at your savings. If you think an annuity is right for you, or if you have an annuity and it is draining you, now may be the time to come in and sit down with Coach Pete or one of his advisors to discuss it. Call the team at Capital Financial to get a true practical review and let them help get you on the right road to retirement!