An annuity is a type of investment vehicle that you can purchase from a bank, typically to supplement your income in retirement. The premise is relatively simple – you set aside a certain amount of money in your annuity and the money grows over a set period of time called the accumulation phase. Typically, you are unable to withdraw any money during this phase without incurring significant fees. At the end of this set period, you receive regular payments from the annuity, which is called the annuitization phase. Hopefully, your investment has done well and the money you originally set aside has grown to a larger sum.
While the general concept of an annuity is simple, there are many different variables to consider if you are thinking of purchasing an annuity, like how long the accumulation phase should be, how long you want to receive payments and whether you prefer a fixed or variable annuity. A fixed annuity means you’ll receive equal payments during your annuitization phase, whereas a variable annuity means your payments will be dependent on how much your investment grew. If your investment does well, you could receive higher annuity payments. If your investment does poorly, your payments will be lower.
Annuities can be a great option if you’re looking to secure another stream of income in retirement. However, the different features we discussed above are just a small fraction of the many details to consider when reviewing your options for an annuity. Check in with your financial advisor and don’t be shy about asking lots of questions before making your decision.
