When you invest in an annuity you are investing in an insurance product that will provide you cash payments later. Annuities are an option that some people choose to include in their retirement planning due to the fact that an annuity will provide them with a cash flow.
How the Annuity Works
The annuity works something like an insurance policy, but it is really an investment. Typically you pay a lump sum of money at the time of the investment. In some cases, you may make additional contributions to the investment. You will get a return off of this investment in the future in either a lump sum or a series of payments. Some annuities give you the option of collecting payment for a predetermined number of years, or you can choose to receive payment for the rest of your life.
One of the appealing features of an annuity is that the tax on the return you earn is deferred until you start withdrawing money. The amount of money you receive back in a lump sum or through payments will be determined by how long you have been making payments and the amount of your original investment. How long you plan to collect will also have an influence on the amount you receive.
An additional factor that will determine how much money you receive back from this investment includes if you want a fixed annuity or a variable annuity. The difference between the two is that with a fixed annuity you are guaranteed payments, while the amount that you get with the variable annuity can vary, and is actually determined by how well the investments used for the annuity do.
The Two Types of Annuities
When you invest in an annuity you will invest in either a deferred annuity or an immediate annuity. When you invest in a deferred annuity you will have to wait a certain period of time before you will receive anything back on your investment, but with an immediate annuity you can begin collecting on your investment almost right away. With this type of investment your money won’t build up like it does with the deferred annuity. Basically, the deferred annuity is like letting the money in your bank sit untouched, while it grows to greater amounts.
Annuities are not good investments for everyone due to their high cost and fees, so if this is an investment option that you are considering you will want to make sure you do a great deal of research to ensure that investment is right for you.