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There are many different ways to structure annuities, but the basic types of annuities are immediate and deferred. In this article we will go over several ways to secure your retirement income with both types of annuities so you can understand the advantages and disadvantages of both.
Immediate Annuities
Of the two types of annuities, this is the more popular option. A lot of people have 401k plans or IRAs that provide a nest egg, but do not protect your income. People are uncomfortable knowing that once their nest egg is gone, it is gone. With an annuity, you will receive a guaranteed monthly payment for as long as you live. This is the main draw to this investment option.
An immediate annuity is a rather simple insurance policy. You give the annuity company a sum of money, and they distribute it back to you with interest every month beginning immediately. Most policies are structured to continue for as long as you live. In other words, you cannot outlive the annuity under any circumstances.
When you have a 401k or otherwise, have some money to invest in your retirement, you may want to consider how high your income can get with this money. For some of us, the monthly annuity payment coupled with Social Security nearly reaches our income before we retired. Since both programs are guaranteed for life, we could count on this money every single month until the end. There is no better feeling of comfort and security.
Deferred Annuities
This is the second of the two types of annuities. This is also an insurance policy that you would purchase from the annuity company. However, this type of annuity will not begin making payments until a predetermined time has passed or you request to have the annuity converted into an immediate annuity.
There are a few different reasons why you would want to purchase a deferred annuity.
Growth: If you purchase your annuity long before you plan on retiring, the annuity will grow every day until you begin taking payments. Therefore, it will take a smaller investment today to get to the income you will need when you retire.
Payments: Many of us don’t have a million dollars to put into an annuity that we will not need for another 25 years. However, we can still purchase a smaller annuity and add to it as often as we wish. The initial and subsequent contributions will grow every day and we will also spend less to get the guaranteed monthly income we will need during retirement.
Inheritance: For most of us, we are already well established in the world when our parents pass. Simply, we do not need the inheritance we are left by our parents. However, we can use the money received to fund our own retirement. This is especially true when we are in our forties or fifties. Using the money to purchase a deferred annuity will ensure our own comfortable retirement.
Windfall: Over the course of our lives some of us will receive a large amount of money. Perhaps this is from selling a business, an inheritance or selling our primary or secondary home. This is an excellent opportunity to purchase a deferred annuity. The idea of guaranteeing our income during retirement with one single move 20 years before we will need it is a comforting thought.
Of the two types of annuities, one is more popular than the other but both are excellent choices. There is nothing stronger than having that guaranteed monthly payment regardless of what happens to our nest egg.
