You hear about annuities all the time, especially in association with retirement planning, but do you really know what one is? At core, annuities are pretty simple. When you buy an annuity, you’re called the annuitant and you’re giving money to a company in return for payments in a fixed amount over a period of time, either for life or for a term of years.
You can make a series of payments for the annuity or you can pay for it all at once. You can opt to receive your annuity payments back in any number of ways; monthly, quarterly, semi-annually, or yearly.
Depending on the type of annuity you purchase, the payments may roll over to your spouse when you pass away; however, the more common scenario is that the annuity payments terminate upon your death.
It’s important to shop around before you decide on which annuity you’ll invest in, because some annuities are safer investments than others. Generally, fixed annuities are less risky than variable annuities. A fixed annuity gives you a guaranteed payment regardless of how much the market fluctuates. The payout on a variable annuity, on the other hand, is tied to the performance of the underlying investment on which your annuity is based. In a strong market, a variable annuity has the potential to work in your benefit. In a weak market, however, a variable annuity will work against you.
The right annuity can mean stable and predictable supplemental retirement income. However, because they can be costly, annuities are not for everyone. Before you decide to buy, it’s a good idea to do your homework and check with an experienced and trustworthy financial advisor.