How Does an Annuity Work?

Planning for retirement can be stressful, especially when it comes to financial stability. Knowing what options are out there to provide a stream of income to support your retirement lifestyle can help you navigate retirement planning. Annuities are one of the many different forms of retirement income available to you. We will walk you through how an annuity works, the different types, and things to consider when looking at purchasing an annuity.

How Does an Annuity Work?

So, how does an annuity work? An annuity is a contract between you and an insurance company. You pay a particular amount upfront or make regular payments to the insurance company, and in return, they pay you a fixed income for some time. You can receive this income monthly, quarterly, annually, or in a single payment. When you purchase an annuity, you are buying a promise from the insurance company to provide you with a certain amount of income for a specific period or the rest of your life. The exact terms of your annuity depend on the insurance company you are working with. Research or ask a financial advisor what annuities are available in the market to find one that aligns with your retirement goals.

Annuities are a popular retirement option because they offer a set income stream that can help supplement the retirement income you may get from Social Security, pensions, and other investments. Another perk about annuities is that they offer tax-deferred growth, meaning that any earnings on the annuity are not taxed until they get withdrawn.

What Are the Different Types of Annuities?

There are three main types of annuities: fixed, variable, and indexed. Fixed annuities offer a set or fixed interest rate for a predetermined period of time. Fixed annuities can potentially provide a stable income stream and are typically a good option for those who want to be sure of their income.

Variable annuities allow you to invest your annuity payments into a range of funds, such as stocks, bonds, and mutual funds. This type of annuity can provide a higher potential return but also comes with more risk. Take the time to understand the potential risks involved with variable annuities and your own risk tolerance before investing.

The last main annuity is an indexed annuity. This kind of annuity offers a return based on the performance of a stock market index. Indexed annuities can be considered a middle ground between fixed and variable annuities. Indexed annuities can provide a higher potential return than a fixed annuity while still offering some protection against market fluctuations.

Annuities can be a valuable tool for retirement planning, but it is critical to understand how they work and what type of annuity is best suited for your needs. If you are considering an annuity, do the proper research and consult a financial advisor to ensure it aligns with your retirement goals.

Benefits Of Annuities

Annuities have a number of different benefits depending on which type you pick and what your retirement goals are. However, all annuities have three primary benefits. The main benefit is having an additional source of retirement income. Annuities are designed to help individuals accumulate funds over time and then convert those funds into a steady income stream that can last for a specific period or even for the rest of their lives. This can be especially beneficial for those who are concerned about outliving their savings or who want the security of a predictable income in retirement. Another benefit is the tax advantages. Annuities can provide tax-deferred growth, meaning you won’t have to pay taxes on your investment until you begin receiving payments. The last common benefit is that annuities can be useful tools for estate planning and wealth transfer. When an annuity owner passes away, the remaining funds can be transferred directly to designated beneficiaries, bypassing the probate process and creating a smoother transfer to your beneficiaries.

How To Choose the Annuity That’s Right for You

When choosing an annuity, it’s necessary to consider your retirement needs and goals, such as travel, health care, loans, etc. There are various annuities to choose from, with fixed, variable, and indexed annuities being the main three. Fixed annuities are great if you want more stability as they provide a guaranteed interest rate and payout, while variable annuities allow for more flexibility in investment options but come with more risk. Indexed annuities combine features of both fixed and variable annuities.

It’s also important to consider the fees and charges associated with annuities. Some annuities have higher fees and surrender charges that can pull from your investment returns. Make sure to carefully read the contract and understand all the expenses before making a purchase.

Conclusion

Annuities can be a valuable tool for retirement planning. They can provide an additional stream of income and tax-deferred growth. Choosing the right annuity for your individual needs and goals is crucial. By doing so, you can further prepare for the retirement you want. Work with an advisor from Oxford Advisory Group to learn more about annuities and how they can work for your retirement goals.

 

This report was prepared by Oxford Wealth Group, LLC, a federally registered investment adviser under the Investment Advisers Act of 1940. Registration as an investment adviser does not imply a certain level of skill or training. The oral and written communications of an adviser provide you with information about which you determine to hire or retain an adviser. Form ADV Part 2A & 2B can be obtained by visiting https://adviserinfo.sec.gov and search for our firm name.  Neither the information nor any opinion expressed it so be construed as solicitation to buy or sell a security of personalized investment, tax, or legal advice.

This is prepared for informational purposes only. It does not address specific investment objectives, or the financial situation and the particular needs of any person who may receive this report.