What Are Annuities and How Can They Work for You in Retirement?
An annuity can help you turn a portion of your savings into regular income payments, providing you with a steady stream of income during your retirement years. Learn about how annuities work, the different types of annuities, and how annuities can work for you in your retirement.
What Are Annuities?
An annuity is a financial product that provides you with a steady stream of income payments (usually guaranteed) for a designated period of time or for the rest of your life.
Annuities have the following main features:
- Predictable payments: You usually receive fixed guaranteed income payments for a designated period of time or for the rest of your life.
- Tax-deferred growth: You pay taxes only when you make a withdrawal and only on the amount you withdraw.
- Death benefits: In most cases, your annuity payments stop when you die; however, with certain providers, you can name a beneficiary to inherit the remaining fixed guaranteed income payments after you die (death-benefit provision).
How Do Annuities Work
In exchange for a lump sum investment or in the form of regular investments over time (the accumulation phase), you receive income payments for a certain period of time or until the end of your life (the payout phase).
You can choose when to start receiving the payments—right away or at a later date.
The income payments are generally paid out monthly, quarterly, semi-annually, or annually and can depend on the amount you deposit, your age and life expectancy, current interest rates, return on your investment, and the type of annuity, among other factors.
What are the Different Types of Annuities
3 basic types of annuities are:
- Life annuity: You receive guaranteed (fixed) lifetime income payments.
- Term-Certain Annuity: You receive guaranteed income payments for a fixed period of time.
- Variable Annuity: A variable annuity is very different from a non-variable annuity like the two described above. A variable annuity is part investment, part annuity; the income payments you receive depend on the performance of an investment portfolio.
It is best to consult with a trusted financial professional for the type of annuity best suited for your needs, particularly in the case of variable annuities because they have higher fees and more complex formulas that many investors may not understand.
How Can Annuities Work for You in Retirement?
Buying an annuity can provide a steady guaranteed income stream that you can use during your retirement years. If you wish not to outlive your money, buying an annuity can make a lot of sense. But purchasing an annuity is not the only way to create a steady income stream in retirement. Your retirement income can come from a number of different sources, including your own, personalized investment portfolio of dividend-paying stocks. Here’s why this approach can be a good alternative to purchasing an annuity.
Your Personalized Investment Portfolio of Dividend-Paying Stocks
Broadly speaking, annuities are different from stocks, which can pay dividends and provide potential capital gains. When you purchase an annuity, the upside becomes very limited. If you are currently looking for the best financial product to achieve both growth and income, you may be better off in the long-term, depending on your personal income tax situation, investing in a diversified investment portfolio of dividend-paying stocks rather than buying annuities.
Established in 1985, Bloom Investment Counsel, Inc. is a Toronto-based independent, privately-owned boutique investment management firm with experience in managing in excess of $2.5B in assets over the years. For more than 25 years, we have specialized in one thing and strive to be the best at it—investing in income-generating investments, specifically dividend-paying stocks.
We provide our clients with, and actively manage on their behalf, their own personalized investment portfolios of dividend-paying stocks that protect, preserve, and build wealth for the long-term, while generating a stable income stream (if desired).
Our clients include wealthy individuals, family offices, foundations, corporations, institutions and trusts.
If you are looking for your investments to generate income, growth, and a stable cash flow (if desired), Bloom Investment Counsel, Inc. is the right independent investment manager to speak to.
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This content is provided for general informational purposes only and does not constitute financial, investment, tax, legal or accounting advice nor does it constitute an offer or solicitation to buy or sell any securities referred to. Individual circumstances and current events are critical to sound investment planning; anyone wishing to act on this content should consult with his or her financial partner or advisor.