Think of a long train journey, one that may recur for decades down the line. This means it would require purchasing back-and-forth tickets, perhaps hundreds of times.
You have two options to choose from: buy tickets each time and hope to have enough for subsequent trips, or invest in an upfront lifetime pass. Those who choose the latter can go with the train’s clockwork. No unnecessary stress, no ticket queues, and no fear of running out of money.
A guaranteed seat is a bright prospect for as long as the pass endures. Annuities are a lot like the train pass, where some plans do cover you for life. They are an investment tool particularly used for retirement planning.
Are you new to this concept of golden nest payout? If yes, then consider this article as your guide. We will discuss the basics of annuity along with the different plans available for senior citizens.
The Basics of Annuity
An annuity may be described as a written contract that a financial institution issues to distribute invested funds through a fixed interest stream. The distribution of income may begin right away or in the future against paid premiums.
According to 1891 Financial Life, it’s possible to purchase an annuity with a lump sum or fixed monthly payments. While some annuities are designed to provide income for life, others are limited to a fixed period or until a specific event.
The main purpose of annuities is to secure an individual’s post-retirement life. Many seniors live with a constant fear of outliving their assets. An annuity provides a steady flow of cash whenever required to alleviate post-retirement financial fears.
Types of Annuity Plans Seniors Can Choose From
Annuities for seniors are available under numerous categories. Some differ in the way premium payments are made, some in the way they earn interest, whereas others vary based on the timeline of income payments.
In the previous section, we have already mentioned how annuities may differ based on premium payments. You can pay an upfront single lump sum amount or a series of fixed monthly installments.
Now, let’s dive into the other two categories. We will discuss them individually to understand their various types.
Based on Interest Earnings
Different annuity plans earn interest in different ways. Mainly, they can be classified into two types –
- Fixed annuity – Investopedia states that a fixed annuity is a contract wherein the buyer receives interest at a fixed rate. Though such a plan’s growth is slow, it is steady and reliable.
- Variable annuity – This type of annuity’s interest rate varies based on the performance of the investment portfolio. Variable annuities usually offer higher returns, but they involve an element of risk.
Based on Income Payment Timelines
Not all annuities offer income payments at the same time. Annuity plans may be further classified into the following two categories based on income payments –
- Immediate annuity – Under this annuity plan, you can start getting income payments within a year from the date of your first purchase. Keep in mind that this plan does not allow any additional withdrawals.
- Deferred annuity – This type of annuity offers income payments after several years, usually after retirement. It allows your money to grow tax-deferred for a while.
How to Choose the Right Annuity Plan
In general, annuities are highly popular investment tools. 2024 was considered to be a historic year in terms of annuity considerations. The increase recorded among both individual and group annuities was the highest in the past two decades.
While annuities are popular, not every plan is for everyone. This means it’s important to choose a plan that is relevant to your needs. The first category should not be difficult to decide. If you have a decent lump sum amount, you can buy an annuity upfront. If not, choose to pay premiums in fixed monthly installments.
As for the other categories, your risk tolerance and time factor matter. If you’re risk-averse, it’s best to invest in an annuity plan with a fixed rate of interest. Those with a high risk appetite can opt for a variable annuity.
Deferred annuities may be a good choice for seniors who still have a bit more time to grow their funds. As a result, you may earn higher dividends. If your retirement is just around the corner (in a year or so), choose an immediate annuity.
Additional Considerations
Knowing the different types of annuities only helps when you keep in mind some additional considerations. Elder fraud is on the rise and can take many forms, including fake investment schemes. Give further thought to the annuity plan you choose by keeping these in mind –
- No agent selling annuities should ever be too pushy. They are required to disclose all details honestly and accurately. If you feel pressured, politely decline the offer and look for a more reliable institution.
- Always be mindful of surrender charges. They are usually levied when you ask for a withdrawal during the accumulation period.
- If you already feel like you may need to withdraw money during the accumulation period, it’s best to opt for an immediate annuity.
- If you’re choosing a deferred annuity due to tax benefits, keep in mind that you must allow the principal to become a long-term investment.
- If an agent urges you to move your money from one annuity to another, be careful. This change may cost you high fees.
With this, you should be ready to invest in an annuity plan. A recent survey has found that millions of Americans are falling behind on their retirement goals. Over half of those surveyed feared running out of money if they stopped earning.
If you have even a year before retirement kicks in, now is the time to invest in a lucrative annuity plan. A little can go a long way here; plus, it’s possible to have a guaranteed source of lifetime income with this financial product. Just choose a plan wisely to meet your unique post-retirement needs.
