Annuities: Earnings for Retirement and Beyond
An annuity is basically a contract you make with an insurance company. You make either a single payment, or a series of payments to the insurer. In return, they will give you back a fixed amount every month, starting immediately, or after some period that you have agreed upon. Typically, annuities will provide for tax-deferred earnings growth and may include a death benefit.
A lump-sum of money can be invested into a retirement annuity using income you may receive from fixed deposits or benefits from work. You would make a one-time payment with these benefits into the annuity. In this way, after a few months, you would begin receiving immediate income upon retirement.
Annuities are a good tool available to you in your retirement planning. Throughout your working years, you are able to deposit a nominal amount into the annuity each month. Throughout the years, these deposits can add up to a large amount of money. Depending on whether you picked a fixed or variable annuity when you opened the account, your money will earn interest or it will be invested in the equity markets or mutual funds.
The pay back from the insurance company starts at a point in time that you choose, typically when you retire. Depending on the scheme you had chosen, these payments may be for a fixed period, say 20 years, or they may continue for your lifetime. In a fixed annuity scheme, the payments are fixed, while in a variable scheme, the periodic payments will depend on how well your investments perform.
An indexed annuity takes into account the changes in one of the well-known equity indexes. Returns vary based on the changes in the selected index. Usually there is a guaranteed minimum return. Equity-Indexed annuities give you the best of two worlds by combining the features of fixed-return traditional annuities and the equity market.
Since variable annuities work like securities, they are regulated by the SEC. Fixed annuities are not securities and hence do not come under the purview of the SEC. Since an indexed annuity combines insurance and securities features, depending on the mix of features, it may or may not be regarded as a security. Typically these types of annuities are not regulated by the SEC.
- Kenneth Nuss
