An Introduction to Annuities

Preparing for retirement can be one of the most daunting tasks we ever undertake in our lives.  How are you supposed to set aside enough money to last from when you retire for the rest of your life? There are actually many products available that you can use to help secure a vibrant future!

When you have finally saved what you think is enough for retirement, you do not want to worry about the upward and downward movements of the stock market.  Some retirement plans or pension plans organized through your employer will invest in an annuity.  The annuity will give you a fixed income for a set duration of time after you retire.

If you are anything like me,you will want to be risk averse, and an annuity is one of the best ways to minimize risk.  In retirement, you cannot bear fluctuations in the value of your portfolio, because if you withdraw money when the market isn’t performing well, you are compounding the loss. Annuities can be viewed as a type of insurance for your retirement income.  You contribute money to the annuity for the guarantee of an income in the future.

How is the value of an annuity calculated?

The value is determined by factors including the current value of the dollar, the number of years until you would like to begin receiving an income, the rate of inflation, and your life expectancy.  Taking these and other factors into account, an actuary will calculate the value of your annuity.

Put simply, if you live longer than expected, you will get back more than you put in. However, if you pass away sooner than anticipated, you could end up receiving less than what you contributed.

Shopping around

Many people don’t realize they can shop around for an annuity and pick an annuity provider that can best suit their preferences.Popular options include inflation-adjusted annuities,and enhanced annuities, which are designed for people with a serious medical condition where life expectancy is reduced.

There is also a range of options available to when in terms of you would like to receive your payments.  Whether you want to receive your payment at the beginning of each month, the beginning of the year or anywhere in between, an annuity provider can work with you to best suit your needs.

Whatever your situation, if you are nearing retirement and you haven’t already done so, an annuity is definitely something to look into.  Talk with your financial advisor to see which product would be most suitable for you.

 Photo by: 401 K 2012
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