Annuities Made Simple
The term "annuities" confuses people because it really has two different meanings. Formally defined, an annuity is a yearly payment made to an investor, usually on a monthly basis. However, in the world of investments, the word refers to a tax-deferred investment called a tax-deferred annuity, or simply a retirement annuity.
So, annuities can be an income stream, often for life. Or, they can be a way to invest for retirement with certain advantages and a tax break called tax deferral. To make things even more confusing, you can invest in a retirement annuity and accumulate money for retirement, and then elect to exchange the money in your investment for a guaranteed monthly income for the rest of your life.
Now, go back and read that last sentence again. Here's where I will make things simple for you. I think retirement annuities are fine investments for those who are middle-aged and older who want to earmark money for retirement. The tax deferral advantage allows you to make your money grow without the interruption of paying income taxes as you go, much as in a traditional 401k or IRA plan.
The truth be told, you can simply invest here and let your money grow. Then, when you retire and really need some additional income, you can pull some money out each year by making "partial surrenders". When you take money out, you may owe incomes taxes if this money represents earning or interest, but that's OK. You will likely be in a lower tax bracket than when you were working and avoiding taxes due to the tax deferral advantage.
Do not be misled by what you hear or read. You are not required to exchange the money in your annuity account, in any annuity that I know of, for a lifetime stream of income. This is called taking an annuity option. If you do this, you are telling the insurance company to keep your money, and pay you an income for life or for some other defined period of time. Once you make such a decision, that money is no longer yours.
I was a financial planner for years, and sold plenty of annuities. Most of my clients who bought them from me held on to them well into retirement. Upon death, the value of their annuity passed to their beneficiary, usually their spouse. Never did I suggest they take an annuity option, unless this is what they wanted, and they really understood the consequences.
So, annuities can be an income stream, often for life. Or, they can be a way to invest for retirement with certain advantages and a tax break called tax deferral. To make things even more confusing, you can invest in a retirement annuity and accumulate money for retirement, and then elect to exchange the money in your investment for a guaranteed monthly income for the rest of your life.
Now, go back and read that last sentence again. Here's where I will make things simple for you. I think retirement annuities are fine investments for those who are middle-aged and older who want to earmark money for retirement. The tax deferral advantage allows you to make your money grow without the interruption of paying income taxes as you go, much as in a traditional 401k or IRA plan.
The truth be told, you can simply invest here and let your money grow. Then, when you retire and really need some additional income, you can pull some money out each year by making "partial surrenders". When you take money out, you may owe incomes taxes if this money represents earning or interest, but that's OK. You will likely be in a lower tax bracket than when you were working and avoiding taxes due to the tax deferral advantage.
Do not be misled by what you hear or read. You are not required to exchange the money in your annuity account, in any annuity that I know of, for a lifetime stream of income. This is called taking an annuity option. If you do this, you are telling the insurance company to keep your money, and pay you an income for life or for some other defined period of time. Once you make such a decision, that money is no longer yours.
I was a financial planner for years, and sold plenty of annuities. Most of my clients who bought them from me held on to them well into retirement. Upon death, the value of their annuity passed to their beneficiary, usually their spouse. Never did I suggest they take an annuity option, unless this is what they wanted, and they really understood the consequences.
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