How Does an Annuity Work?

If you’re nearing retirement, you’re likely considering additional income streams and ways to manage your retirement savings. For some, annuities are a great way to ensure a steady income stream during retirement. However, annuities are not for everyone. Here’s what you need to know about buying an annuity in Worthington, OH, and whether it’s the right investment for you.

What is an Annuity?

An annuity is a type of investment you make with an insurance company. After paying a lump-sum or a series of payments, you are paid a regular annual, quarterly, or monthly payment by the insurer. Annuity payments may begin immediately or in the future, depending upon the annuity product selected.

Annuity funds are accrued on a tax-deferred basis and can only be accessed after the age of 59.5 without tax penalties. If funds are withdrawn due to dire financial needs, surrender charges and penalties will apply. Once distributions begin, income earned on the annuity is taxed at the regular income tax rate rather than the long-term capital gains tax rate.

5 Most Popular Types of Annuities

Many annuity features, such as the duration of disbursements and when they begin, can be customized based on your needs, preferences, risk tolerance, and financial goals. By working with a financial advisor, you can determine what type of annuity is best for you and your retirement plan.

1. Immediate annuities
   An immediate annuity is one in which the investor, or annuitant, begins receiving monthly, quarterly, or annual payouts right away. This annuity is also known as an income annuity or single-premium immediate annuity (SPIA).
2. Deferred annuities
   A deferred annuity is one in which the annuitant doesn’t receive regular payments or a lump-sum payment until a future date. This type of annuity is typically best suited for someone looking to supplement other forms of retirement income, like Social Security benefits or a pension.
3. Fixed annuities
   As its name suggests, a fixed annuity pays out a fixed rate over a specified period of time. The fixed payments are based on the amount of money paid to the insurer during the accumulation phase, the annuitant’s age, and the length of payment. While many people appreciate the predictability of fixed annuity contracts, the downside is their modest return.
4. Variable annuities
   A variable annuity is valued based on the performance of the annuitant’s selected mutual funds. While these annuities can result in higher returns than fixed annuities, they tend to be riskier because they are dependent on the performance of mutual funds in your sub-account. The most popular variable annuity is a deferred annuity. If the annuitant were to die before the payout phase, their beneficiaries would collect a guaranteed death benefit.
5. Indexed annuities
   Indexed annuities, also known as fixed-index or equity-indexed annuities, pay interest rates based on certain market indexes. For example, an indexed annuity might be based on a market index like the S&P 500. When the markets perform well, so does this type of annuity; however, contract stipulations like participation rate, yield caps, and rate caps may limit the rate of return.

Who Should Consider an Annuity?

Financial advisors often recommend annuities to retirees or those nearing retirement age because they can be a low-risk way to ensure a steady stream of income throughout retirement. Of course, choosing an annuity and what age to begin depends heavily on each individual’s circumstances. Things to consider include:

• Other investments
• Risk tolerance
• Expected longevity
• Income necessary for retirement.

To learn more about annuities and if they’re the right investment option for you and your retirement plans, talk to Matt Jehn, a Worthington, OH-based fiduciary at Royal Oak Financial Group. Annuities can be extremely complex and should be reviewed with a financial professional that has a comprehensive understanding of your retirement plans, investment objectives, and goals. Matt can work with you to create an extensive financial plan and earn guaranteed income throughout retirement and for the rest of your life.