Retirement is the second innings of life. A person is over with their career and wishes to enjoy the rest of their life doing new things, exploring new places, and picking up new hobbies. However, financially securing your retirement is crucial to enjoying your retirement.
To safeguard the future, one must start planning and taking actions in the present only. Starting a retirement fund is the first step to securing your future. But, if you try to manage a retirement fund yourself, it becomes hectic as you have to factor in the taxes, inflation, payouts, and many intricate financial things.
So, choosing an annuity is the best option to safeguard your retirement effortlessly. Opting for the best annuity plans in the market ensures that you will not outlive your money and hedges your financial interests.
An annuity is nothing but an agreement between you and the insurer that ensures you a guaranteed and timely payout on your retirement or the rest of your life. To receive an annuity after your retirement, you pay the insurer a series of monthly payments or a lump sum amount, and the insurer provides you regular payout as per the agreed payout structure. You have to decide when you want to start receiving those payments based on your retirement plans.
An annuity plan is divided into two stages – the accumulation and the distribution stage. You pay the insurer and build your annuity funds in the accumulation stage, followed by the distribution stage. You begin to receive monthly, annual, or lump sum payouts by the insurer to sustain your living.
However, how you pay the insurer and the payout intervals are dictated by your agreement and the type of annuity you choose.
Types of Annuity
The different types of annuity are based on when you want to receive the payout payments and how you want to pay the insurer.
This type of annuity serves the annuitant’s long-term interest. You invest in the annuity fund either by paying a lump sum or monthly installments and then receiving annuity payouts for a specified period. This type of annuity is most preferred because the money you pay to the insurer acquires interest between the accumulation stage and distribution stage.
So, you get the money you have been paying with the accumulated interest at the time of your retirement. Moreover, the tax structure of the annuity makes them more beneficial since they receive pre-tax contributions. This means that your income from the annuity will only be taxed once you withdraw the money.
Deferred Annuities offer you flexibility in regards to the payout. You can choose from a lump-sum payout plan or a monthly payout plan. You can even decide to withdraw the annuity all at once.
As the name suggests, fixed annuities offer the annuitant a flow of income by providing them a fixed rate of interest on the funds they have accumulated or invested with the insurer.
Fixed annuities can either be immediate or deferred. Under immediate type, the annuity provides a fixed payout to the annuitant determined by the amount invested, the annuitant’s age immediately after the accumulation period. Whereas, under deferred, they have the option of interest at a fixed rate on their invested amount and receiving the payout later in the future.
People who prefer to take less usually opt for Fixed annuities as they prefer the stability of a fixed rate over the volatility of the market and the possibility of receiving more interest.
It is the more volatile and risky option of the bunch. However, with greater risk, variable annuities offer more rewards as well. When you opt for a variable annuity, it gives you the option to invest in a more diversified portfolio of various accounts or investment funds. However, the amount you can withdraw as your annuity majorly depends on how well these funds perform. In technical terms, this is known as hedging, wherein you do not put all your eggs in one basket but rather diversify your investments.
Choosing variable annuities is something that not everyone should opt for as there is a greater risk of losing money. If you have a deep understanding of the financial market or have trustable advisors, you should consider a variable annuity.
There is no one rule for everyone on choosing the best annuity type for your retirement funds. So, research well and try to seek advice from experts in the field. Having an experienced financial advisor on your team will only benefit you. This will enable you to explore more options and the advisor would do their best to protect your financial interests.