How a Retirement Annuity Works

The lump sum or multiple payments you make to an insurance provider can give you guaranteed returns for a set period, such as your entire life; this is basically how a retirement annuity works. While the payments you are set to receive are guaranteed by the federal government, how much you get and how long you will be paid depends mainly on when you start receiving payments and when you made your initial investment towards the annuity. You may also make multiple payments to receive money from a retirement annuity, and will have to pay up to the end of the payment period in order to generate yields from this type of insurance product.

The issuer of the annuity, typically an insurance provider, will determine the number of payments to you based on average life expectancy and other data, which they will arrive at through research. In general, living longer than your expectancy will result in the generation of payments beyond the actual worth of the annuity, while passing on earlier than expected will result in less overall payments. For instance, you may buy into an annuity with a lump sum payment of $50,000 while the insurer estimates that you have a couple of decades more to live. If you live beyond twenty years, you will still get annuity payments even if all payments go beyond the worth of the additional investment.

Annuity Types

There are numerous kinds of annuities, each of which may be adjusted to some extent to suit the needs and financial capabilities of the annuity buyer. In a nutshell, the most common annuity types are deferred and immediate annuities, which are defined by the payment structure of the product.

Deferred annuities are the more popular annuity of the two. The average investor typically buys into this kind of annuity, which requires the holder to put in his or her investments over a certain period, after which he or she will receive monthly payments after finishing that period or reaching a certain amount of money invested.

Immediate annuities are a good investment for individuals who have gained a considerably large amount of money and want it distributed over a period of time in increments. For example, you may be able to ensure that a million-dollar inheritance will last you for the rest of your life after putting the million dollars in an annuity, which can then result in monthly payments with specific return rates.

If you are in the market for a low-risk product to help preserve wealth in retirement, consider the various kinds of retirement annuities. Depending on your financial capabilities and requirements, an immediate retirement annuity or deferred retirement annuity may be right for you.

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