In a time of economic uncertainty like the COVID-19 pandemic, an annuity could be a safer way to invest your money than the stock market. That may especially be true if you’re looking at early retirement. Many people look to annuities as a way to receive periodic payments once you no longer receive a salary.
An annuity is a contract between you and an insurance company that requires the insurer to make payments to you, either immediately or in the future. You buy an annuity by making either a single payment or a series of payments. Similarly, your payout may come either as one lump-sum payment or as a series of payments over time.
What Annuities Provide
According to info at Investor.gov, an official website of the US government run by the Securities and Exchange Commission, annuities typically provide three things:
- Periodic payments for a specific amount of time. This may be for the rest of your life, the rest of your spouse’s life, or the life of another person you designate.
- Death benefits. If you die before you start receiving payments, the person you name as your beneficiary receives a specific payment.
- Tax-deferred growth. You pay no taxes on the income and investment gains from your annuity until you withdraw the money.
Three Types of Annuities
There are three basic types of annuities: fixed, variable, and indexed.
With Fixed Annuities, your insurance company promises you a minimum interest rate and a fixed amount of periodic payments.
With Variable Annuities, your insurance company allows you to direct your annuity payments to different investment options, usually mutual funds. Your payout will vary depending on how much you put in, the rate of return on your investments, and expenses.
Indexed Annuities combine features of securities and insurance products. Your insurance company credits you with a return that is based on a stock market index, such as the Standard & Poor’s 500 Index. Importantly, indexed annuities typically provide you with principal protection. That means the money you put in is never directly exposed to the stock market. This offers you protection against down markets.
From our years of experience, Farris Financial understands the importance of protecting assets. We believe indexed annuities provide less risk than a variable annuity while also offering more growth potential than a fixed annuity. This is why we’re proud to offer Indexed Annuities as a way to protect your investments while maintaining positive growth potential.
Phases of Annuities
There are two phases to annuities, the accumulation phase and the payout phase.
During the accumulation phase, you make payments into the annuity.
During the payout phase, you get your payments back, along with any investment gains. You may take the payout in one lump-sum payment, or you may choose to receive a regular stream of payments. Regular payments are generally monthly.
Getting Started, Lowering Risk
Adding an indexed annuity to your investment portfolio is potentially a good way to grow your money with low risk. For that reason, it is often an attractive investment for people who are close to retirement age. The stock market and 401Ks can at times seem risky for retirees who don’t want to risk losing the money they saved up over a lifetime. Indexed Annuities can provide a great way to save for retirement, or turn your savings into a stream of retirement income. Some do both.