Annuities can be an essential component of a comprehensive retirement plan. However, they are often misunderstood leaving some with more questions than answers. The goal of annuities is to be used as a safety net to help provide a guarantee of some sort and are commonly used to provide a guaranteed stream of income. Annuities were developed with the sole purpose of mitigating the concern that income will not be guaranteed in retirement. With the cost of living and national life expectancy rising, it is expected that many of us will live longer than we thought – or worse, than we have financially prepared for, which is why annuities can be so important in a comprehensive retirement plan.
There are several types of annuities available, including: fixed, variable, fixed indexed, immediate, and deferred annuities. Here are some answers to some of the questions frequently asked.
A fixed annuity is a fixed investment issued by an insurer that pays guaranteed rates of interest, which are typically higher than what bank CDs offer. A major benefit of a fixed annuity is that you can defer income or draw income immediately. Fixed annuities are most popular amongst the retirement and pre-retirement communities, as it offers the owners no-cost, modest, and guaranteed fixed investment.
A deferred annuity delays payments until a future date which must be greater than 12 months. These enable individuals to increase their income source later in life for less money because the insurer is not committed for as long when the income payments are deferred. This type of annuity mostly appeals to people who want guaranteed income in the future, or for those who want to create a ladder of income over different periods later in life. For example, many will want to work during retirement and will not need the annuity until after they have completely stopped working.