Facts About Annuities

Annuity sales to seniors have been on the rise in recent years, in part because of certain advantages they can offer such as protection of your principal and lifetime income stream options which can provide peace of mind as you head into retirement. But if you are considering buying an annuity product, make sure you do your research so you can make an informed decision.

First of all, what are annuities? An annuity is a contract between you and the insurance company. It is typically a longer term investment vehicle used to supplement your retirement income. Depending on the type of annuity and contract, it may provide for a fixed rate of return or a variable rate during your accumulation years. Individuals often purchase annuities for retirement purposes as certain types of annuities may pay a guaranteed income as long as you live.

Annuities have changed throughout the years and over the last decade many have been restructured by insurance companies to make them more appealing to consumers. Still annuities are frequently misunderstood. Consult with a Financial Services professional to fully understand whether an annuity is an appropriate investment for you and your retirement needs. 

There are two basic types of annuities: deferred and immediate With a deferred annuity, your money accumulates tax deferred for a certain period of time until you choose to start taking withdrawals or you convert into a lifetime income stream that you cannot outlive, typically in retirement. In an immediate annuity you begin to receive a set schedule of payments, for life or a certain number of years soon after you make your initial investment.

Although annuities fall into these two categories, they also can be classified as Fixed, Indexed, or Variable depending on the type of contract and investment vehicle used. A Fixed annuity offers either a multi-year guaranteed rate or a fixed rate that adjusts each year, however they are typically higher than bank issued CDs. An indexed annuity links potential earnings to a market index, such as the S&P 500. However, it’s important to know that your funds are not invested in the market. You can realize gains when the index grows, however the value in your account cannot decrease when the market drops.

Variable annuities are tied to other investments like stocks, bonds, and mutual funds. The rate of return on these annuities is tied to the performance of these investments which allows the investor to benefit when these investments rise, however they can also drop in value when these investments fall. Each of these products has certain contract guarantees so always check with your agent for specifics.  

To learn more about annuities, look for these important topics in future e-Update newsletters: advantages and disadvantages of annuities, turning your 401(k) or IRA into lasting income, annuity payout options, and which annuity riders make sense.

To help you with a no-obligation consultation visit AAA.com/annuity or call toll-free 1-888-870-9395 to speak to a Financial Services agent.