How annuities work and what option is best for you
by Kathy Manson
Annuities are a type of investment many people make to create an income source in the future. You might be confused because annuities cover a wide range of financial products. For example, a life contingent structured settlement could also be considered an annuity, because the former really refers to any type of payment. However, a life contingent structured settlement is typically payments given to someone who has won a court case. If you get into an accident and you sue someone, you might get a life contingent structured settlement, which are monetary payments given to you for as long as you live to compensate you for your injuries. However, in most cases, annuities refer to a type of financial or investment vehicle, rather than a life contingent structured settlement. Many insurance companies offer clients to help them supplement their retirement income.
Typically, annuities work this way: the client gives the company a set amount of money or give them money over a period of time. The insurance or financial company will then invest the money for them over the next few years. As you near retirement age, you will have a choice to annuitize the amount, that is, you can get a fixed monthly amount for the rest of your life. You can also choose to take loans and withdrawals from your annuity. Let's take a look at both options, so you can decide which is best for you.
Option 1: Withdrawals and loans
Some advisers are against annuitizing and advise that you should delay the annuitization as long as possible. That's because the rules become less flexible when you do this. When you annuitize, you are locked into the company's payment schedule, plus you have to pay fees on the annuity set-up.
So, if you don't want to annuitize, you can just use the money when you need it. Withdrawals are typically better, and you only take out what you own and what you have earned, plus you don't pay interest. You might have to make a minimum withdrawal each year, so check with your company.
Option 2: Annuitize
You might also want to annuitize, because this means a guaranteed income while you live. Basically, if you choose to annuitize, you get a set amount for the rest of your life. So let's say you have $100,000 total in your account after 20 years. The company may offer you a set monthly amount, like $800 per month while you live. As long as you are alive you get this amount, even if you live until 120 years old. You can't give this to your beneficiary, but you can opt to take a joint annuity with your spouse. So, if you get a joint annuity, you might get less, like $700, but your spouse will continue to do so until the rest of his or her life, even if you pass on.
Withdrawing and annuitizing are two of the main things you can do with your annuities. To decide what's best for you, you should sit down with your financial adviser and try to analyze what works based on your needs and current situation, as this is not always the same for everyone.
I am Kathy Manson and grew up in a working class family in Lowell, MA. I have completed my bachelor's degree in Business Management from Boston College. I have worked for a number of big financial firms like Charles Schwab and Fidelity Investments until I decided to strike it out on my own as a structured settlement consultant at www.catalinastructuredfunding.com
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