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Annuities may be a very good option for investors in search of regular income during retirement. To start, it is important to learn some basic annuity terms. These 12 key terms will enable you to understand how annuities work and whether or not they suit your retirement plan. A financial advisor can even enable you to evaluate an annuity contract to your retirement plan needs.
An annuity is a financial product that gives a gentle income stream, often used for retirement planning.
While you buy an annuity, you contribute funds to an insurance company, which agrees to make periodic payments in the long run. These payments may be customized to fit your needs, making annuities a dependable approach to secure income and stretch your retirement savings.
There are three primary varieties of annuities:
Fixed annuities provide guaranteed payouts for predictable income.
Variable annuities allow you to put money into funds, with payouts depending on investment performance.
Indexed annuities link returns to a stock market index and offer some protection against market losses.
Annuities include advantages like guaranteed income and potential tax benefits but in addition have drawbacks. Most notably, fees can vary widely and affect your returns, and contracts can offer limited liquidity.
A lady comparing different annuity contracts.
In the event you are considering an annuity as a part of your retirement plan, these 12 common terms can enable you to understand how annuity contracts work:
Annuitant: The annuitant is the person whose life expectancy determines the annuity payments. Their age and life expectancy are used to calculate the payment amounts and they sometimes receive the income from the annuity.
Beneficiary: A beneficiary is the person or entity chosen to receive any remaining annuity advantages after the annuitant’s death. Naming a beneficiary allows the annuity’s value to be distributed in accordance with your plans.
Accumulation phase: That is the period if you contribute to the annuity. During this time, your contributions grow tax-deferred, allowing the investment to extend in value before payouts begin.
Distribution phase: The distribution phase, also called the payout phase, is when the annuity starts providing income to the annuitant. Payments may be structured as a lump sum or regular installments over a set period.
Give up charge: A give up charge is a fee for withdrawing funds from an annuity before a set time. Knowing these charges can enable you to avoid unexpected costs if you happen to access your money early.
Rider: Riders are optional additions to an annuity contract that customize it to your needs. Common examples include guaranteed lifetime withdrawal advantages and long-term care coverage.
Fixed vs. variable annuities: Fixed annuities provide guaranteed payments, while variable annuities have payments that change based on investment performance. Your alternative will depend on your risk tolerance and financial goals.
Tax-deferred growth: Annuities grow tax-deferred until you make withdrawals, allowing your investment to potentially grow more over time.
Mortality and expense risk charge: This fee covers the insurance company’s risk of guaranteeing lifetime income and will likely be a part of variable annuities.
Guaranteed minimum withdrawal profit (GMWB): Guarantees a minimum withdrawal amount no matter market performance. This feature provides a security net for annuitants.
Immediate annuity: Begins payments shortly after a lump sum is paid to the insurer. Immediate annuities are suitable for people who need income straight away.
Life annuity: Provides payments for the annuitant’s lifetime, offering income that lasts so long as they live. This kind of contract can assist address concerns about outliving financial resources.
A lady occupied with her retirement plan.
Annuities provide a gentle income stream, but understanding the terms may be difficult. Key terms like “deferred annuity” and “immediate annuity” determine when payments begin. “Deferred annuities” let your investment grow tax-deferred until you withdraw, while “immediate annuities” start payouts soon after a lump sum is invested. For more clarity, consider speaking with a certified retirement financial advisor (CRFA).
A financial advisor can enable you to manage your nest egg to lower retirement taxes and maximize income. Finding a financial advisor doesn’t must be hard. SmartAsset’s free tool matches you with up to a few vetted financial advisors who serve your area, and you’ll be able to have a free introductory call together with your advisor matches to make a decision which one you are feeling is correct for you. In the event you’re ready to search out an advisor who can enable you to achieve your financial goals, start now.
Mandatory distributions from tax-deferred retirement accounts can complicate your post-retirement tax planning. SmartAsset’s RMD calculator can assist estimate your required minimum distributions.
