An Introduction to Annuities

Annuities are financial products for those seeking stable retirement income guaranteed by an insurance company. They are a popular choice for investors who want to receive a steady income stream in retirement.

At a basic level, here 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.

Money that you invest in an annuity grows tax-deferred. When you eventually make withdrawals, the amount you contributed to the annuity is not taxed, but your earnings are taxed at your regular income tax rate.

The size of your payments is 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. How much you receive depends on whether you opt for a guaranteed payout (fixed annuity) or a payout stream determined by the performance of your annuity's underlying investments (variable annuity).

4 Types of Annuities

• Income annuities provide an insurance company guaranteed stream of income starting now or in the future.
• Fixed annuities provide growth at a guaranteed interest rate with no risk of market loss.
• Index-linked annuities pay interest at either a fixed rate or based on the performance of an index.
• Variable annuities let you invest and potentially grow your retirement savings.

While annuities can be useful retirement planning tools, one downside is that they sometimes have high expenses. Before investing in an annuity, it is a good idea to speak with a financial advisor who can explain whether this type of product is a good fit for someone in your situation.

Although it is possible to have guaranteed income for life with a fixed annuity, there is no assurance that this income will keep up with inflation. There is a surrender charge imposed during the first 5 to 7 years or during the rate guarantee period. Index annuities are insurance contracts that, depending on the contract, may offer a guaranteed annual interest rate and some participation in growth, if any, of a stock market index. Such contracts have substantial variation in terms costs of guarantees and features and may cap participation or returns in significant ways. Any guarantees offered are backed by the financial strength of the insurance company, not an outside entity. Investors are cautioned to carefully review an index annuity for its features, costs, risks and how the variables are calculated. The guarantee of the annuity is backed by the claims paying ability of the issuing insurance company. Variable Annuities have a surrender charge imposed generally during the first 5 to 7 years that you own the contract. Withdrawals prior to age 59 1/2 may result in a 10% IRA tax penalty, in addition to any ordinary income tax. The guarantee of the annuity is backed by the financial strength of the underlying insurance company. Investment sub-account values will fluctuate with changes in market conditions.

Registered Representative(s) of and securities and advisory services offered through Cetera Advisor Networks LLC, member FINRA, SIPC, a Broker/Dealer and a Registered Investment Advisor.  Securities and investments products are: Not FDIC/NCUSIF insured - May lose value - Not financial institution guaranteed - Not a deposit - Not insured by a federal government agency. Cetera is under separate ownership from any other named entity.

Source: https://money.cnn.com/retireme...