Annuity Investment Guide
An annuity is a financial product that provides regular payments in exchange for a lump sum investment. Commonly used for retirement income, annuities convert savings into guaranteed income streams. Fixed annuities provide predictable payments, while variable annuities fluctuate with market performance. Immediate annuities start paying right away, while deferred annuities accumulate value first.
Annuities offer longevity protection - payments continue for life (or a set period), ensuring you won't outlive your money. A $250,000 annuity at 5.5% might provide $1,500 monthly for 25 years. If you live longer, payments continue. If you die early, beneficiaries may receive remaining value depending on the contract terms.
However, annuities have significant drawbacks: high fees (often 2-3% annually for variable annuities), surrender charges for early withdrawal, complexity, and reduced liquidity. Many financial advisors recommend covering essential retirement expenses with Social Security and pensions, using annuities only for additional guaranteed income if needed. Carefully compare costs and benefits before purchasing.
Quick Tips
- Always compare APR, not just interest rates
- Use the Rule of 72 to estimate doubling time
- Extra payments dramatically reduce total interest
Frequently Asked Questions
Annuities suit retirees wanting guaranteed income beyond Social Security and pensions, especially those without traditional pensions or concerned about longevity risk. However, high fees and complexity mean they're not right for everyone.
Fixed annuities provide guaranteed payments. Variable annuities fluctuate with investments. Indexed annuities tie to market index with floors and caps. Immediate annuities pay right away. Deferred annuities accumulate then pay later.
Most have surrender periods (5-10 years) with hefty penalties for withdrawals. After surrender period, you can withdraw but lose future payment benefits. Read contracts carefully - annuities are designed for long-term commitment.
For non-qualified annuities, each payment is part principal (tax-free return of investment) and part earnings (taxed as ordinary income). Qualified annuities (bought with retirement account funds) are fully taxable.
Depends on the contract. Period-certain annuities pay beneficiaries remaining payments. Life-only annuities stop at death. Joint-life annuities continue to a spouse. Cash refund annuities pay remaining principal to beneficiaries.