Making Better Financial Decisions

What Is An Annuity, And Should You Invest In One?

by Glen Hawkins

An annuity is a type of financial product that can be used to provide regular income payments over time. It's a popular investment option for those seeking to save for retirement since it offers several benefits over other products. Here's what you need to know about annuities, how it works, and the pros and cons of investing in one.

What Is an Annuity?

An annuity is a contract with an insurance company. You deposit a lump sum into the contract, which, in turn, provides guaranteed income payments at a pre-determined point in the future. Annuities are typically long-term investments with a fixed rate of return that are designed to last through retirement years.

How Does an Annuity Work?

An annuity works by providing guaranteed income payments from the insurance company on either a monthly or annual basis, depending on what was agreed upon in the contract. The amount of money that will be paid out over time is based on factors such as age, health, lifestyle, and risk tolerance. The money put into the annuity will grow tax-deferred until withdrawn, at which point taxes must be paid on any gains made while in the account.

What Are the Benefits of Investing in an Annuity?

The primary benefit of investing in an annuity is that it provides guaranteed income payments throughout retirement years when other investments may not do so with certainty. The value of stocks, for example, is subject to market volatility, while annuities are not. Knowing exactly how much you will receive on a monthly basis with an annuity is reassuring to many people.

Additionally, annuity planning services offer tax advantages by helping your earnings to grow tax-deferred until withdrawn from the account.

What Are the Drawbacks of Investing in an Annuity?

The biggest drawback to investing in an annuity is that it can be confusing to understand. Luckily, when you work with an annuity planning service, your annuity adviser can explain each step clearly and concisely, so you are comfortable with your investment choices.

Additionally, once invested funds are invested, they are locked into place until maturity. While this isn't necessarily a bad thing, it does mean that investors cannot access their funds quickly if any unexpected circumstances arise, such as illness or job loss.

When considering whether or not to invest in an annuity, it's important to understand both its benefits and drawbacks before making any final decisions. Annuity planning services can help guide you through all aspects of choosing and managing your investments to maximize your return.

Reach out to an annuity planning service to learn more.