When planning for retirement, there are a myriad of investment options. The most common option is to use a retirement account — either a work plan like a 401(k) or one you get through a financial institution like an Individual Retirement Account (IRA) — and invest in various stocks. , bonds and funds. While these investments are good for building wealth, there’s one thing they don’t do: create income that will help replace the income you won’t have after you stop working. For that, you’ll probably want to consider a different choice – annuities.
And with high interest rates, annuities are especially popular Now that investors are turning to lock in high rates of return on their annuity contracts.
Annuities can be a bit tricky, however, so you’ll want to take the time to educate yourself in order to make the right choices. You can also consider working with a licensed financial advisor who can guide you on how to incorporate annuities into your plans.
What is an annuity?
Simply put, a annuity is a contract you enter into with an insurance company. As with any other insurance policy, you will pay a premium up front in return for the promise of money to be paid to you later. Unlike an auto or home insurance policy, however, the collection of this money is not contingent on any accident or incident; you are guaranteed payment at a predetermined time.
The details of an annuity – your premium payments, how much you’ll get retirement, how often you will receive dispersions and for how long – are all determined when you buy the annuity. Again, be sure to take your time to get the best product for you. A Financial Advisor can help you make the right choices, but be careful if you work with an advisor who can sell you the annuity contract himself. Such an advisor will likely earn a commission and may be motivated to sell you a policy that is not the best for you.
Fixed or variable annuities
There are many subtypes of annuities, but they fall into two main categories: fixed annuities and variable annuities. Here’s what you need to know about both:
Fixed annuity basics
A fixed annuity is the most basic type you can buy. There is a guaranteed interest rate and a fixed term over which you are paid scatters once you reach retirement.
The advantage of a fixed annuity is that you know exactly what you are getting. Your payouts are not dependent on the whims of the market or any other outside force.
Within this category, there is a special type of annuity called an indexed annuity. This sees your premiums invested in a stock index. It is generally considered a way to combine a fixed annuity with a variable annuity (described below).
The basics of the variable annuity
A variable annuity works the same way as a fixed annuity – you pay premiums in exchange for money later in life. The difference is that your money is invested in the market, often in bonds or stocks. The amount of money you receive in dispersion payments depends on the performance of these investments – although you are generally protected against losing your capital.
Should you get an annuity?
There is no simple answer to the question of whether or not a person should use an annuity as part of their retirement plan. Again, talking with a Financial Advisor is the best way to find out if it’s a good idea for you.
That said, one of the most fundamental questions to ask yourself about whether or not an annuity is right for you is whether having an income in retirement is important to you. If you’re confident in your ability to save money for retirement in a retirement account — and, more importantly, in your ability to budget for it effectively in retirement — an annuity may not be necessary. If, however, you want money to flow into your account each month, an annuity might be a good option.
The essential
An annuity is a contract between a person and an insurance company. You agree to pay a premium up front and in return you receive payments at retirement. There are different types of annuities available, and a Financial Advisor can help you make the right choices for you.
Annuity advice
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A Financial Advisor can assure you that you are able to use annuities effectively. Finding a qualified financial advisor doesn’t have to be difficult. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your corresponding advisors for free to decide which one is best for you. If you’re ready to find an advisor who can help you achieve your financial goals, start now.
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Another insurance product you should consider as part of your financial plan is life insurance. This will help secure your family’s future should anything happen to you.
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