How Do Annuities Work?
It’s essential to be diligent and thorough in planning your future. As you progress through your working career, there are many steps you should consider when planning your retirement and post-employment lifestyle. Annuities may represent a desirable option to consider as you secure your financial future; however, these opportunities may also be complicated and nuanced. As such, it’s essential to ensure you understand them fully before making any significant financial decisions.
What Are Annuities?
Annuities are financial arrangements usually agreed upon by you and an insurance provider. These products can provide greater financial security while approaching and enjoying retirement. In general, annuities can be viewed as agreements in which the seller (i.e., insurance company) agrees to provide payments to the buyer (i.e., you) at some point in the future. Although the details of annuities may vary, most are categorized as one of the following types:
- Variable annuities—These agreements provide ample opportunity for your investment to grow over time and may be advisable for those willing to risk the ebbs and flows of the stock market.
- Fixed annuities—These annuities offer modest growth opportunities using a minimum interest rate while guaranteeing your initial investment will not lose value.
How Do Annuities Work?
By purchasing annuities, you can supplement other savings and retirement investments (e.g., 401ks) to ensure additional financial resources after you exit the workforce. Specifically, annuities can provide you and your family with the following benefits:
- Lifelong income—By using a process called annuitization, you can reallocate your annuities to provide a consistent and reliable income stream throughout the rest of your life. These payments continue throughout your lifetime and may even pay out in excess of your account’s original value.
- Care for loved ones—Annuities can create critical financial security for your spouse, dependents and other family members.
- Tax advantages—Investment earnings accrued from annuities are not taxable until you decide to make a withdrawal. Furthermore, you will not face tax-related consequences if you choose to rebalance or adjust your investments.
How Much Can I Invest in Annuities?
One of the primary differences between annuities and 401ks or IRAs is that there are generally no investment limits. You may choose to invest however much you wish into various annuities. For example, you might choose to commit a safe amount of money into a fixed annuity to guarantee future income while investing the rest in a variable annuity to give you ample opportunity for growth. Some annuity companies may have premium restrictions, which limit the funds you can invest in a single year.
At Mequell Green Insurance Agency, our dedicated staff has served individuals, families and businesses in the greater Richmond area since 1997. We will draw on our knowledge and experience to help you understand how annuities can help secure your future financial security. Contact us today to get started.
This blog is intended for informational and educational use only. It is not exhaustive and should not be construed as legal advice. Please contact your insurance professional for further information.