If you are considering buying an annuity to provide steady income during retirement, it's important to understand the different types and how they work. Here's a look at the fundamentals of annuities and what to consider before making a decision.

Annuities: The Big Picture

An annuity is a contract between the contract holder and an 澳洲幸运5开奖号码历史查询:insurance company. In return for your contributions, the insurer promises to pay yoﷺu a certain amount of money, on a periodic basis, for a specified period. Many people buy annuities as a kind of retirement-income insuran🎃ce, which guarantees them a regular income stream after they've left the workforce, often for the rest of their life.

Most annuities also offer 澳洲幸运5开奖号码历史查询:tax advantages. The investment earnings grow tax-free until you begin to withdraw income. This feature can be attractive to retirement savers, who can contribute to a deferred annuity for many years and take advantage of tax-free 澳洲幸运5开奖号码历史查询:compounding 𝄹in their investments with guaranteed cash flows paid out in the future.

Annuities typically have provisions that penalize investors if they 澳洲幸运5开奖号码历史查询:withdraw funds early. Also, tax rules incentivize investors to postpone withdrawals until they reach a minimum age (59 ½). Withdrawing before that will result in a 10% penalty set by the 澳洲幸运5开奖号码历史查询:Internal Revenue Service (IRS). However, most annuitie﷽s allow investors to make withdrawals for qualified purposes without penalty, and some annuity contracts have a provision for withdrawals of up to 10% - 15% for any purpose per year without penalty.

Compared with other types of investm꧑ents, annuities can have high fees.

How Annuities Work

There are two main categories of annu🌳ities, based on when they begin to pay ou🎃t: immediate and deferred.

With an 澳洲幸运5开奖号码历史查询:immediate annuity (also known as an immediate payment annuity), you give the൲ insurance company a lum🐠p sum of money and start receiving payments right away. Those payments can either be a fixed amount or a variable one, depending on the contract.

Typically, you might choose this type of annuity if you have a one-time windfall, such as an inheritance. People who are close to retirement may also take a portion of their retirement savings and buy an immediate annuity as a way to supplement their income from Social Security and other sources.

澳洲幸运5开奖号码历史查询:Deferred annuities are structured to meet a differen🥀t investor need: to accumulate capital over your working life, which ca🅰n then be converted into an income stream for your later years.

The contributions you make to the annuity grow tax-deferred until you take income from the account. This period of regular contributions and tax-deferred growth is called the 澳洲幸运5开奖号码历史查询:accumulation phase.

You can pu♊rchase a deferred annuity with a lump sumᩚᩚᩚᩚᩚᩚ⁤⁤⁤⁤ᩚ⁤⁤⁤⁤ᩚ⁤⁤⁤⁤ᩚ𒀱ᩚᩚᩚ, a series of periodic contributions, or a combination of the two.

Types of Annuities

Within the broad categories of i♏꧂mmediate and deferred annuities, there are also several different types from which to choose. Those include fixed, indexed, and variable annuities.

Fixed Annuities

A 澳洲幸运5开奖号码历史查询:fixed annuity provides a pred🀅ictable source of retirement income, with relatively low risk. You receive a specific amount of money every month for the rest of your life or another period you've chosen, such as five, 10, or 20 years.

Fixed annuities offer the security of a guaranteed rate of return. This will be true regardless of whether the insurance company earns a sufficient return on its own investments to support that rate. In other words, the risk is on the insurance company, not you. That's one reason to make sure you're dealing with a solid insurer that gets high grades from the major 澳洲幸运5开奖号码历史查ꦬ询:insurance company credit rating agencies.

The downside of a fixed annuity is that if the investment markets do unusually well, the insurance company, not you, will reap the benefits. What's more, in a period of serious 澳洲幸运5开奖号码历史查询:inflation, a low-paying fixed annuity can ♛lose speꦕnding power year after year.

Your state's department of insurance has jurisdiction over fixed annuities because they are insurance products. State insurance commissioners require that advisors have an insurance license to sell fixed annuities. You can find contact information for your state's insurance department on the 澳洲幸运5开奖号码历史查询:National Association of Insuranc𝔉e Commissioners website.

Indexed Annuities

澳洲幸运5开奖号码历史查询:Indexed annuities, also called equity-indexed or fixed-indexed annuities, combine the features of a fixed annuity with the possibility of some additional investment growth, depending on how the financial markets perform. You're 澳洲幸运5开奖号码历史查询:guaranteed a certain minimum return, plus a return pegged to any rise in the relevant market index, such as th🐽e S&P 500.ꦯ The amount of participation in the index, however, is generally capped.

Indexed annuities are regulated by state insurance commissioners as insurance products. In most states, agents must have both an insurance license and a securities license to sell them. The 澳洲幸运5开奖号码历史查询:Financܫial Industry Regulatory Authority (FINRA), a self-regulatory organization (SRO) for the securities industry, also requires that its member firms monitor all products their advisors sell, so if you deal with a FINRA member firm, you might have another set of eyes watching the transaction.

Variable Annuities

Unlike indexed annuities that are tied to a market index, 澳洲幸运5开奖号码历史查询:variable annuities provide a return that's based on the performance of a portfolio of mutual funds that you have selected. The insurance company may also guarantee a certain minimum income stream if the contract includes a 澳洲幸运5开奖号码🍸历史查询:guaranteed minimum income benefit (GMIB) option.

Taking Distributions from Annuities

Once you decide to start the distribution phase of your annuity, you inform your insurance company. The insurer's actuaries then determine your periodic paym😼🐟ent amount by means of a mathematical model.

The primary factors that go into the calculation are the current dollar value of the account, your current age (the longer you wait before taking an income, the greater your monthly payments will be), the expected future 澳洲幸运5开奖号码历史查询:inflation-adjusted returns from the account's assets, and your life expectancy based on industry-standard life-expectancy tables. Finally, the spousal provisions included in the contract are factored into the equation. For example, an 澳洲幸运5开奖号码历史查询:annuitant might choose to r🐓eceive monthly payments for the rest of their life and their spo📖use's life, in case their spouse outlives them.

If you live for a long time after you start taking distributions, the total value you receive from your annuity contract could be significantly higher than what you paid into it. However, should you die relatively soon, you may not get your money's worth.

Annuities can have many other provisions, such as a guaranteed number of payment years, otherwise known as a 澳洲幸运5开奖号码历史查询:period certain annuity. Under that provision, if you (and your spouse, if applicable) die before the guaranteed payment period is over, the insurer pays the remaining funds to your heirs.

Generally, the more guarantees in an annuity 💞contract, the smaller your monthly payments ꦚwill be.

The Bottom Line

Annu♏ities may make sense as part of an overall retirement plan, especially if you are uncomfortable with investing or concerned about outliving your assets. You may want to consult with a financial advisor, who can help you decide whether an annuity or another type of investment will be best for providing the money you need during retirꦛement.