When planning for retirement, people think about investing in pension plans which assures a lump sum amount on retirement. However, there is another way of saving for retirement by investing in annuities known as financial tools. Not many people are aware of how it works, feels Paul Haarman. Knowing annuities will give you more options in planning your retirement savings that offer more options for leading a comfortable life after retirement. Annuities are long-term savings schemes that provide many benefits in fulfilling your long-term financial goals, and the reasons for getting annuities should become clear ongoing through this article.
What is an annuity?
The insurance companies offer annuities which are long term contracts of investment with the company that promises to provide a steady stream of income after retirement. You can make a lump sum investment at a time or in monthly installments as stipulated in the contract. After retirement, you will start receiving monthly payments of the agreed amount for the rest of your life. After retirement, a steady flow of income is of great benefit as it can support your lifestyle for many years without bothering about the market conditions and interest rates. The insurance company keeps paying the agreed sum every month according to the terms of the contract, explains Paul Haarman.
Types of annuities
Annuities are of three types – fixed type, variable or indexed.
- You will receive a specified sum of money every month guaranteed by the insurance company in the fixed type of annuity.
- The variable type of annuity offers variable payouts because it depends on the interest rates, and you must accept it as it comes. Typically the market forces come into play when calculating the monthly payout. Thus, it is for those who are ready to take greater risks in the hope of higher returns.
- An indexed annuity is a hybrid of the fixed and variable model. It provides a guaranteed minimum payout and links the returns from the other part of the investment to S7P 500 or some similar market index.
- An option for a deferred annuity is also available and suitable for those who prefer the flexibility to get the payouts at a specific time as planned earlier.
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Protection for your initial investment
No matter which type of annuity you choose, protecting your investment must be high on your mind, and you must select safe investments wisely by considering your risk tolerance and life goals. You must maintain the proper balance so that you are somewhere midway between taking too much risk and being utterly averse to taking a risk. Remember that no risk means no gain.
For the best protection of your initial investment by keeping it constant, you must go for a fixed annuity. The choice is between a deferred annuity and immediate payment, which is most preferred because it ensures a steady flow of money from the time you need it and continues for the rest of your life if you choose a suitable scheme. Having a predictable income after retirement can be a lifesaver.
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