Figuring out your financial plan for retirement should be a top priority for everyone. However, it can sometimes feel like dealing with a different language due to all the different retirement products available. If you are wondering how fixed deferred annuities might fit into your retirement plan, keep reading for answers to the most common questions.
What Is an Annuity?
Simply, an annuity is a form of fixed income.
While there are many different types of annuities, they all follow the same basic format.
Annuities have two phases.
An accumulation phase, during which the purchaser funds the annuity with either periodic payments or a lump-sum payment.
The second phase is the payment phase, during which the purchaser receives a fixed payment for a set period of time or the remaining lifetime of the purchaser.
The length of time an annuity is paid out over will affect the size of the payments, with shorter terms yielding larger payments.
What Is a Fixed Annuity?
A fixed annuity allows you to know the value of your payments upfront.
The money that is put into the annuity during the accumulation phase earns interest at set rates.
The purchaser of the annuity is guaranteed that the annuity will pay no less than the minimum rate of interest specified in the plan.
Generally, the amount of the payments is set at the start of the payout period and does not change for the life of the annuity.
A fixed annuity can either be deferred or immediate.
As the names suggest, an immediate annuity starts paying the purchaser sooner than a deferred annuity.
However, the payments may start up to a year after paying the premium.
Deferred annuities spread out the accumulation period over time delaying the time between when you start paying premiums and when you start receiving payouts.
What Are the Advantages of Annuities?
Fixed deferred annuities offer a safe and steady investment return.
The return is lower but less risky than higher-yielding options therefore annuities may appeal to risk-averse investors.
Annuities grow tax-deferred, meaning you won’t pay taxes on the interest earned by your annuity allowing your savings to grow faster.
Another advantage of an annuity is that there is no contribution limit, allowing you to put away more money for retirement than just an IRA or 401k plan.
A fixed deferred annuity can be a great asset to a retirement plan.
Always speak with a qualified financial advisor about which types of financial products would be best for your retirement.