One option for retirement income are annuities, and are nothing more than contracts offered by insurance companies that allow you to accumulate funds tax-deferred, and once retired begin to receive income or income that can be for a number certain years, or for life.
These instruments were created as a protection for longevity, and ensure that the person will have the necessary resources while alive.
While it is true that this product is offered by insurers, is not an insurance policy. The annuity is a form of investment to accumulate funds which should contribute amounts known as premiums, and in return the insurer will pay a flow of income in the future.
Annuities can be immediate or deferred, fixed or variable.
If your goal is to receive a steady stream of income in a very close and lifelong future, it might interest you to immediate annuity because it allows you to deposit a lump sum and start receiving income within a very short period of time, usually after year.
This is a good choice if you’re about to retire, because you can use the money you’ve accumulated in a retirement plan, 401 (k) or IRA, as a lump sum and start receiving streams of income either monthly, quarterly, semiannually or annual.
The deferred annuity is designed to make your money grow deferring taxes until you begin to receive the flow of income in the future, usually within several years.
Fixed annuities guarantee you pay a fixed interest rate for a specific period of time. In other words, whether the market goes up or down the rate agreed with the insurance performance is guaranteed, and once the period of the contract or agreement ended, a new interest rate for the next period is established.
While variable annuities are closely related to the performance of the investment options you have selected either money market funds, stock fund or index funds, which may be capital losses being higher risk than in fixed annuities, but also they offer greater potential for return on investment. Both contributions and earnings in variable annuities will grow tax-free.
Something very important thing to consider is that commissions and fees from the sale of variable annuities are among the highest in the market, which is why many vendors try to aggressively promote these products, so before buying should carefully review the contract and associated costs. It also verifies that the insurer is registered.
Like any other product, you should compare the conditions of the contract, costs, fees, and the creditworthiness or reputation of the insurer.
It is very difficult to cancel an annuity and the insurance you may be charged a penalty of up to 8%, and thereto is added 10% penalty would charge the IRS for early withdrawals if they are made before age 59 ½ years old.
Annuities are not for everyone because each investor has different objectives and strategies, but the most likely to benefit are elderly people who want more performance at a lower level of risk.