What is an annuity?
An annuity is a contract between you and an insurance company, wherein the insurance company provides you with regular income payments, beginning either immediately or at some future date, depending on the type of annuity being purchased.
Annuities can be purchased with either a lump sum payment or through a series of payments leading up to the distribution period (i.e., the time when income payments begin). Some annuities offer additional benefits such as lifetime income payments, downside protection, enhanced death benefits, and growth potential based on the performance of certain investments held within the annuity itself.
Given the numerous products available, investors may want to consider speaking with a Financial Advisor to make sure the annuity they are considering aligns with their financial goals, time horizon, tolerance for risk and other personal factors.
What are the three key benefits of annuities?
Guaranteed income: Annuities can generate guaranteed lifetime income, allowing you to retire with a "paycheck," to put it in more familiar terms. This can also help mitigate the risk of outliving your retirement assets.
Growth potential: Annuities allow for tax-deferred growth of your investments during the “accumulation phase.” This can help you take advantage of the power of compound growth to help maximize your ability to save for retirement. Some annuities offer exposure to the markets to allow for growth potential while still offering some levels of protection against losses.
Additional financial planning flexibility: Even with an IRA, employer-sponsored 401(k) and Social Security payments, you may still have a retirement income gap – the difference between the cost of your retirement lifestyle and these various sources of income. An annuity can help supplement your income plan, freeing up other assets to be invested toward growth to fill this gap, or possibly freeing up assets to pursue other investment goals altogether.