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Understanding the Annuity

Posted on 08 Jun 2011 by admin | Filled under: uncategorized

It is not uncommon for people to include an annuity as part of their retirement planning. An annuity is basically a type of insurance that will provide you with a cash flow during your retirement years.

How an Annuity Works

An annuity is essentially an investment you make payments to. At some point in the future you will be able to receive payment from this investment; this can be in regular payments on a monthly basis, or you can choose to receive your payments on a quarterly or yearly basis. You can even choose to receive all of the money at once.

How much money you get with these payments will depend on a number of different factors, but one of the main things that will determine the amount of your return will be how much you invested in the annuity. Another factor that will determine the amount of money you receive will be whether you want to receive payment for as long as you live, or only for a set number of years.

The Different Types of Annuities

If you decide to invest in an annuity you will have to decide what type of annuity you want. There are basically two types, the fixed annuity and the variable annuity. With the fixed annuity you are guaranteed payment, but the amount of that payment won't change. With the variable annuity the amount of money you receive will depend on how well the annuity investment does.

There is also the immediate annuity and the deferred annuity. With an immediate annuity you can start getting a return as soon as you invest, but with the deferred annuity it is necessary to wait until a later date before you can get a return on your investment. You can convert a deferred annuity to an immediate annuity at anytime, but a deferred annuity will continue to accumulate, and may possibly provide you with more of a return later.

Although investment planners will frequently try to talk people into investing in an annuity, it is important to understand that these cost a lot of money, plus it may not be the best choice for everyone. If you are thinking about adding an annuity to your retirement plan, be sure that you do plenty of research before deciding on this strategy.