Annuities

Planting money AnnuitiesPlanting money Annuities

What Is the definition of an Annuity and what does Annuities stand for?

 

  • In general annuity or annuities are financial products that offer a guaranteed income stream for the buyer, used primarily by people that retired.
  • Generally annuities, at first, are comprised as an accumulation fund used by investors. Investors can fund this annuity product with sums of money at one time or in periodic payments.
  • At the time when the annuitization phase has reached it’s goal, the annuity begins paying out to the annuitant for either a fixed period of time or for the annuitant’s remaining lifetime like in case of the retirement fund.
  • The annuities are structured in many types of instruments such as the following:

 

  • 1. Fixed Annuities;
  • 2. Variable Annuities;
  • 3. Immediate Annuities;
  • 4. Deferred income Annuities. This annuities are the ones that give investors more flexibility.

To define an annuity you have to imagine it like a financial product that pays out a fixed amount of payments to a party.

This annuity financial products are primarily used as an income stream of cash for retired people. Annuities are sold by financial institutions world wide. The financial institutions invest the funds from individuals and grow them until they have to be released back to the buyer.  Annuities help individuals to minimize the risk of outliving their savings.

Upon annuitization, the holding institution will issue a stream of payments at a later point in time.

The period of time when an annuity is being funded and before payouts begin is referred to as the annuity accumulation phase. The annuitization phase of the annuity contract begins when the payments commence releasing.

 

Annuities are used mostly because of the  tax deferring growth of your earnings. Some examples may be death benefits that will pay your beneficiary a specified minimum amount. Even if  tax is deferred for earnings growth, when individuals proceed with withdrawals from the annuity, the gains are taxed at ordinary income rates

 

Who Buys Annuities?

Annuities are recommended for individuals looking for a stable and guaranteed retirement income. Because the lump sum of money put into the annuity is so illiquid and subject to withdrawal penalties, it is not recommended for young individuals because of the high liquidity needs of this financial product.

A good example is a lottery winners. This lottery winners usually purchase immediate annuities. This immediate annuities are usually purchased by people who have suddenly received a large lump sum of money and prefer to exchange the money for a steady cash flow in their future.
If you found this useful you might also read our 401K article to get a better understanding of retirement investing.