A Beginner's Guide To Annuities

Annuities are a type of financial product that can provide a steady source of income throughout retirement. They offer the potential for higher returns than traditional savings accounts and can provide peace of mind for those looking for reliable, long-term income.

But what exactly is an annuity? And how do you decide if it's right for you? Read on to learn more.

How Does an Annuity Work?

An annuity is a contract between an individual and an insurance company where the client pays the insurance company money in exchange for a guaranteed stream of payments over time. The client can choose from different types of annuities, depending on their needs and goals.

Generally speaking, there are two main types –– fixed annuities and variable annuities. Take a closer look at the differences between them.

Fixed Annuities

Fixed annuities are one of the most popular annuity options because they offer a guaranteed rate of return with no market risk. With this type of annuity, the investor pays money into the account and receives regular payments over time at a predetermined rate that does not change regardless of the performance of the markets or other external factors.

For example, a 65-year-old investor might buy a fixed annuity that pays out $500 per month for the next 20 years. The investor will receive this payment regardless of the performance of the markets, so there is no risk associated with the investment. 

Fixed annuities also often come with additional features such as death benefits or inflation protection, making them attractive to those seeking consistent income without risk. Here, the investor might pay a premium for additional coverage that can help protect their money in the event of an unforeseen circumstance.

Variable Annuities

A variable annuity is similar to a fixed annuity but with one key difference — the rate of return is determined by investments made in underlying funds rather than by a predetermined rate set by the insurance company. This means that there is more potential for higher returns but also more risk since your return will depend on how well the investments perform in the market.

Variable annuities are best suited for those looking to take on more risk and potentially earn higher returns. Here, the investor can choose from a variety of underlying funds to invest in, and they have the potential to earn more money over time.

However, variable annuities also come with certain risks. Since the market determines the rate of return, investments are not guaranteed to perform as expected. Additionally, there are fees associated with variable annuities, so it's important to do your research and understand the costs of investing before committing to one.

Should You Get an Annuity?

Ultimately, deciding whether an annuity is right for you comes down to understanding your goals and assessing your risk tolerance. Fixed annuities offer a steady income with low risk, while variable annuities offer higher potential returns but with added market risk. It's important to talk with a financial professional about your specific situation before deciding what type of product best suits your needs.

With careful consideration, an annuity can be an effective way to secure retirement income while reducing worry about uncertain markets and external factors beyond our control. Good luck!