Although an annuity can be used to create a steady stream of supplemental income, it’s essential to understand all of the information surrounding an annuity, its purpose, and whether it fits into your budget. When purchasing annuities, you are essentially purchasing insurance contracts for which you will pay a lump-sum premium. Some annuity companies will allow you to pay your annuity premiums in installments based on a basic payment date schedule.You may choose between immediate or deferred annuities depending on the desired payout. An immediate annuity, for example, typically begins paying the owner within 12 months of the initial contract purchase date. A deferred annuity, by contrast, may take a bit longer for any payout to be issued. For example, if you choose to buy a deferred annuity at 55, for arguments’ sake, you may not receive a penny until you reach 65. This is because deferred annuities take time to grow in overall value.Depending on your overall financial strategy, annuities can work within various scenarios to suit the needs of many investors. In terms of growth, the performance of underlying stock market indexes or benchmarks is something an indexed annuity depends on heavily. Returns are paid depending on the underlying group of investment performance, including mutual funds and stocks, in terms of variable annuities. Many fees apply to purchasing a qualified annuity, such as surrender charges and admin costs, not to mention tax considerations. Because an annuity payment is considered taxable income, the entire distribution is subject to taxation. Because this type of annuity was funded with pre-tax dollars, it will be taxed upon payout beginning at the minimum distribution age of 72. A non-qualified annuity, by stark contrast, does not require taxation upon payout because they were initially funded with after-tax dollars. A non-qualified annuity will grow tax-free over its lifetime, without the stress of required minimum distributions.You have to ask yourself whether an annuity is right for you. Having bountiful retirement income is a significant concern of all aging citizens, and it only makes sense to put money toward it while there’s plenty of time. It may sound appealing to run out and buy an annuity, especially with the enticement of an additional stream of income. But what are some of the reasons to avoid an annuity?If you feel confident in the level of income set back for retirement, an annuity certainly is not worth your time. This is especially true for individuals using Social Security benefits and other investments with annuity income. However, suppose you have any lingering debts that will still be around into retirement. In that case, an annuity can serve as the perfect solution to pay off your debts before or at the beginning of retirement. You must be able to cover the premiums of an annuity, too. If you don’t play to pay said premiums, you could lose your annuity altogether or face draining your savings to maintain the annuity you purchased. What’s worse would be finding yourself in a situation where you need to borrow money to pay off unexpected expenses.Are you facing a similar life expectancy or concerned because your parents experienced a short lifespan? While an annuity can provide retirees with lifetime income, it primarily benefits those who will live long lives. An annuity may not be wise for those facing chronic illness or other serious diseases. If you are facing a shorter lifespan than anticipated, your money may be better used to purchase a life insurance policy.
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