Annuities

Annuities are financial products issued and distributed by a financial institution, which offer a guaranteed income stream. Retirees are great candidates for annuities, because invested funds are paid out in a fixed income stream, and can help individuals address the risk of outliving their savings. An investor can purchase an annuity with either a lump sum payment or with monthly premiums.

These products are designed to provide a steady cash flow for retirees who may have a fear of their existing assets being unable to maintain their standard of living for the remainder of their lives. Annuity investors, referred to as “annuitants”, are typically looking for a stable, guaranteed retirement income, which leads them to purchase an annuity contract from their insurance agent or financial institution. Annuity products are regulated by the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA).

The first stage of an annuity is the accumulation phase, in which the investor funds the product. During this phase, when the annuity is being funded and before payouts begin, any money that has been invested in the annuity grows on a tax deferred basis. Depending on the duration of the annuity, the payment terms and interest rates may vary. Once the payments start, the annuitization phase has begun, and the annuitant will begin receiving payments for a fixed period or for the rest of their life.

Annuities can be structured in various ways, which gives investors flexibility. They may be categorized into deferred and immediate and can be structured as variable or fixed. Immediate annuities are typically purchased by people of any age who have received a large sum of money, like from a lottery win or a settlement of some kind,  and who would like to exchange it for the certainty of cash flows in the future. Deferred annuities, which are mostly preferred by retirees, are designed to provide annuitants with guaranteed income that begins on a date they specify and then grows on a tax-deferred basis. Fixed annuities provide regular periodic payments to the annuitant, while variable annuities allow the owner to receive larger future payments if the investments of the annuity fund are performing well and smaller payments if the investments are not doing well. These products usually have a surrender period, during which annuitants cannot make withdrawals without paying a surrender charge or fee. This period may span several years.