Here’s What You Need to Know About Annuities

What are annuities? You’ve likely heard the term before when reading about or discussing retirement planning options, but you might not understand exactly what function they serve and why you might want to buy an annuity to begin with.

Here’s a quick overview of some of the basics.

What is an annuity, and how does it work?

An annuity acts as a contract between an individual and their insurance company to cover certain goals, including legacy planning, lifetime income or long-term care. They started becoming popular in the United States during the Great Depression era, when people were concerned about market volatility endangering their ability to retire.

With pension plans less popular among employers these days, annuities are an alternative option to get retirement income streams.

Annuities transfer risk from the owner to the insurance company. You pay regular premiums for the company to hold that risk. Premiums can also come in the form of lump sums. In either case, you eventually stop paying the annuity, and it starts paying you.

Annuities can be structured in a variety of ways based on your needs. You can arrange for payments to you or your heirs for a certain number of years, whether for your lifetime, until you pass away, until your spouse passes away or until a specified time of your choosing. If you die during a certain time frame, the annuity will pay your beneficiary the remainder of all your payments for as long as your contractual period remains open.

Similar to Social Security benefits, annuity lifetime income is based on the individual’s life expectancy. The longer the period, the smaller the payouts. This means if you are younger when you start taking annuity payments, or if you have a longer life expectancy or have a longer payout period, your payments will be smaller than they otherwise might.

While some of these aspects of annuities might sound similar to life insurance, they are actually used for different purposes. Annuities are for payouts while you are still alive, while life insurance is for payouts to your family after you die.

Why buy an annuity?

People purchase annuities because of their unique investment power. They offer guaranteed income for the remainder of your life, regardless of how long you live.

This makes them a key part of any retirement investing portfolio. Annuities are a tax shelter and are particularly beneficial if you’ve already maxed out IRAs or 401(k)s. Annuities do not have any contribution limits, unlike those other popular retirement planning vehicles, which means you’ll be able to save as much as you want.

Because the payouts from the annuity are guaranteed no matter what, you also have a little more freedom to be aggressive with your investing.

Interested in learning more about annuities and why and how you can take advantage of them in your retirement and investing portfolios? Contact Safe Path Financial today with any questions you have for our team. We look forward to assisting you with your investing.