An annuity is a type of insurance product that pays out income. It can also be used as part of a retirement strategy. Buyers invest a sum of money in an annuity in exchange for a guaranteed steady monthly income for a set number of years. Insurance companies invest the money deposited in an annuity and the investor, in turn, receives a series of payments. Annuities are marketed as investments that offer peace of mind to individuals who want to secure their lifestyles in retirement.
Retirement annuity rates are determined by a number of factors, including the length of the payment period. Investors can choose to receive payments for a set number of years, or for the rest of their lives. How much they get each month, quarter, or year depends on how much they invest, the features they add on, the type of annuity they choose, and the performance of their investment prior to retirement. There are two main types of annuities:
- Immediate annuities
- Deferred annuities
With immediate annuities, investors begin to receive payouts as soon as they make their initial investment. For example, one might consider buying an immediate annuity as one approaches retirement. When it comes to deferred annuities, money deposited by investors is invested for a period of time until they are ready to begin making withdrawals, usually in retirement.
Within these two categories, retirement annuity rates of payment can either be variable or fixed. With a variable annuity, the rate of return is determined by the performance of the annuity’s underlying investment. This tax–deferred retirement vehicle allows investors to choose from a range of investments. A fixed annuity, on the other hand, provides a guaranteed rate of return for a set number of years. The money deposited by investors is usually placed in a low–risk asset portfolio where it can earn interest until retirement.
Before investing in an annuity, it is important to consider the retirement annuity rates, the strength of the insurance company, expenses, commissions and fees, cancellation fees, and the death benefits.