Annuities can be a big part of retirement and financial planning, but is an annuity right for you? Let’s go over the basics of annuities and how you can make that decision!
The term “annuity” refers to an arrangement between an individual and a financial institution for the purpose of financial insurance. The individual invests in an annuity by paying either a large amount upfront or by paying regular premiums for a certain amount of time. The institution then releases a regular and reliable stream of payments back to the individual for financial stability. Most often used by retirees who want guaranteed income to supplement their savings, annuities offer a steady flow of payments through the later years or even until the end of an individual’s life.
The individual investor, also called the annuitant, must fund the annuity before any payouts can begin. This is called the accumulation phase. In a common deferred annuity, regular tax-deferred payments are made during the accumulation phase. This phase may last several years, depending on the terms of the contract. On the date selected by the annuitant, payouts will begin and last for a predetermined amount of time. Alternatively, the payment could be made with a lump sum investment called an Immediate Annuity. This option allows the annuitant to take a large amount (inheritance, settlement, lottery winnings, etc.) and trade it in for a more reliable stream of income which starts paying out immediately.
The premiums paid to the financial institution during the accumulation phase are invested into an annuity fund. This fund will contain securities, stocks, and bonds. The investment earns returns which are reflected once payouts begin, also called the annuitization phase.
It is very important to note that annuities are not liquid. Those who need access to cash or assets for any major life events should consider waiting until this is no longer a concern or finding another investment option. For this reason, annuities are often suggested for older individuals no longer raising families and, in fact, may not even be available for those under a certain age. During the accumulation phase, which may last several years, investments are held in what is called a “surrender period” where the funds can not be accessed without paying a penalty.
To get the most out of a financial plan, you must have clearly defined goals. Your financial planner will help you figure out what takes priority and develop a financial plan that will help you reach your objectives. This may involve matching you with a detailed savings plan or suggesting specific investments that will help you prepare for the future.
If you’ve never had a financial plan made, you’re missing out on the clarity that these tools offer. To get your financial plan created, contact American Family Solutions.
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Annuities offer security to those whose retirement or savings may not be enough to support their standard of living in their later years. When considering whether an annuity is right for you, it is wise to let financial experts help. At American Family Solutions, we can help determine any hidden fees, provide guidance on complicated tax issues, and ensure you are getting the right type of annuity benefits at the age you need them most.
For more information on annuities, reach out to us today!