What is an Annuity?
An annuity is a financial product that provides a series of payments made at equal intervals. Annuities are often used as a means of securing a steady cash flow for an individual during their retirement years.
Types of Annuities
Annuities can be categorized into several types:
- Fixed Annuities: Offer guaranteed payments and are typically less risky.
- Variable Annuities: Payments fluctuate based on the performance of investment options chosen by the policyholder.
- Indexed Annuities: Return rates are linked to a specific stock market index, combining benefits of fixed and variable types.
How Annuities Work
Annuities are usually purchased through a lump sum or a series of payments. In return, the issuer promises to make regular payments to the investor for a predetermined period, or for the lifetime of the investor, depending on the contract terms.
Benefits and Considerations
While annuities can provide double benefits of income and tax-deferred growth, they often come with high fees and complex terms. Investors should assess their personal financial situation and consult with a financial advisor to determine if an annuity aligns with their retirement goals.