Everything you need to know about this hot investment that can generate guaranteed retirement income

When planning your retirement, there are countless options for investing. The most common option is to use a retirement account — either a workplace plan like a 401(k) or one you get through a financial institution like an individual retirement account (IRA) — and invest in a variety of stocks, bonds, and funds . While these investments are great at creating wealth, there’s one thing they don’t do: generate income that helps replace the income you won’t have after you retire. For that, you’ll probably want to look at another choice: annuities.

And with interest rates high, annuities are particularly popular right now as investors look to lock in high returns on their annuity contracts.

However, annuities can be a bit tricky, so you’ll want to take the time to educate yourself so you make the right choices. You may also want to consider working with a vetted financial advisor who can guide you through how to incorporate annuities into your plans.

What is an annuity?

Simply put, an annuity is a contract that you enter into with an insurance company. As with any other insurance policy, you pay a premium up front in exchange for the promise of receiving money later. However, unlike car or home insurance, collecting that money isn’t contingent on you having an accident or incident; you are guaranteed to receive a payout at a predetermined time.

The details of an annuity — your premium payments, how much you’ll get when you retire, how often you receive spreads, and for how long — are all determined when you buy the annuity. Again, make sure you take the time to get the best product for you. A financial advisor can help you make the right choices, but be careful if you work with an advisor who can sell you the annuity contract himself. Such an advisor is likely to earn a commission and may be motivated to sell you a policy that is not the best for you.

Fixed versus variable annuities

There are many subtypes of annuities, but they fall into two main categories: fixed and variable annuities. Here’s what you should know about both:

Fixed annuity basics

A fixed annuity is the simplest form you can buy. There is a guaranteed interest rate and a fixed term over which you will be paid in installments after your retirement.

The advantage of a fixed annuity is that you know exactly what you are getting. Your payments are not dependent on the vagaries of the market or any other external force.

Within this category, there is a special type of annuity called an indexed annuity. This means that your premium payment is invested in a stock market index. It is generally seen as a way to combine a fixed annuity with a variable annuity (described below).

Variable annuity basics

A variable annuity works in the same way as a fixed annuity: you pay premiums in exchange for money later in life. The difference is that your money is invested in the market, often in bonds or stocks. The amount of money you receive in installment payments depends on the performance of these investments, although you are generally protected against the loss of your principal.

Should you get an annuity?

There is no easy answer to the question of whether or not someone should use an annuity as part of their retirement plan. Again, speaking with a financial advisor is the best way to find out if that’s a good idea for you.

That said, one of the most basic questions to ask yourself about whether or not an annuity is right for you is whether or not having an income in retirement is important to you. If you’re confident that you can save money for retirement in a retirement account — and, more importantly, confident that you can budget it effectively when you retire — an annuity may not be necessary. However, if you want to have money in your account each month, an annuity may be a good option.

It comes down to

An annuity is a contract between a person and an insurance company. You agree to pay a premium up front and in return you get payments at retirement. There are different types of annuities available and a financial advisor can help you make the right choices for you.

Annuity tips

  • A financial advisor can ensure that you can spend annuities effectively. Finding a qualified financial advisor doesn’t have to be difficult. SmartAsset’s free tool pairs you with up to three financial advisors serving your area, and you can interview your advisor matches for free to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.

  • Another insurance product you should consider as part of your financial plan is life insurance. This will help secure your family’s future should anything happen to you.

Don’t miss any news that could affect your finances. Get news and tips to make smarter financial decisions with SmartAsset’s semi-weekly email. It’s 100% free and you can unsubscribe at any time. Register today.

Photo credit: ©iStock.com/tdub303, ©iStock.com/VioletaStoimenova

The post Everything you need to know about this hot investment that can generate guaranteed retirement income appeared first on SmartAsset Blog.

Leave a Reply

Your email address will not be published. Required fields are marked *