While surfing the internet many of us have come across several “click this link” pop ups. While many of those links are click bait and advertise ads for weight loss, growing more hair and other inane subjects there are some that take us to financial sites. Although the question posed to us varies from site to site the gist remains the same: “What do you plan on doing once you retire? How do you plan to earn?”
The site then urges us to purchase a certain amenity called annuity.
The first question many of us have when hearing the word “annuity” is: What does this word mean?
To put it in a nutshell; an annuity can protect your savings, increase what you’ve saved so far or provide a regular stream of income. There are two types of annuities: deferred and income. Both work differently and offer different advantages.
Deferred annuities:
This type of annuity is a good way to increase what you already have in the bank. Like most tax deferred investments your earnings compound over time, this provides scope to grow. Since these have no IRS endowment limits therefore you can invest how much ever you want in order to save up for retirement. Either that or you can use your savings to ensure a steady stream of income to support you whilst you are in retirement. Depending on how the annuities are financed they might not come with MRDs (Minimum Required Distributions).
Under deferred annuities itself there are two kinds again:
- Deferred variable annuities: These contain funds that contain potential for investment growth. However, this depends on the fundamental investment and just like every other stock on the market there is risk involved so if the market value of your investment comes down then you stand to lose money.
- Deferred fixed annuities: This kind of annuity offers anassured rate of growth for a certain number of years. These are more suitable for those who don’t want to take risks with their money and those who want to be financially secure during their retirement years.
Income annuities:
These are suitable for those nearing retirement as they provide a guaranteed source of income for life or at least for a fixed period of time.
Immediate fixed income annuities: This offers assured payment for life or for a fixed period of time. You income is not affected by market fluctuations and therefore there is no increase or decrease in the amount. However you do have to pay extra to keep up with inflation.
Deferred income annuities: These are immediate income annuities that have a period of deferral before the actual payments start. Because of this period there are chances that you would be paid a greater amount than you would get from an immediate income annuity with an equal starting investment.
This article should have cleared up any doubts you have regarding annuities and the next time you see a “click this link” hopefully you can actually read through and understand what the company has to offer.