An annuity is a financial product sold by financial institutions that is designed to accept and grow funds from an individual and then payout a stream of payments to the individual at a later point in time. Annuities are primarily used as a means of securing a steady cash flow for an individual during their retirement years. A fixed sum of money paid to someone each year, typically for the rest of their life. Annuities are a popular choice for investors who want to receive a steady income stream in retirement.
This is how an annuity works, you make an investment in the annuity, and it then makes payments to you on a future date or series of dates. The income you receive from an annuity can be doled out monthly, quarterly, annually or even in a lump sum payment. The sizes of your payments are determined by a variety of factors, including the length of your payment period. You can opt to receive payments for the rest of your life, or for a set number of years.
There are two basic types of annuities, a deferred and an immediate annuity. With a deferred annuity, your money is invested for a period of time until you are ready to begin taking withdrawals, typically in retirement. With an immediate annuity you begin to receive payments soon after you make your initial investment. The deferred annuity accumulates money while the immediate annuity pays out. Deferred annuities can also be converted into immediate annuities when the owner wants to start collecting payments. Regardless of what annuity you have there are many advantages and disadvantages to the holder of the annuity.
The biggest advantage annuities offer is that they allow you to stock away a larger amount of cash and defer paying taxes. Annuities stand alone as the only investment that is inherently accorded tax-deferred status. All money invested into annuities of any kind grows tax-deferred until it is withdrawn. They have no limit to the amount of money that can be placed in