Annuity

An annuity is a financial contract between you and an insurance company, where you make a lump-sum payment or a series of payments in exchange for regular disbursements in the future. This makes annuities a popular choice for retirement income, as they can help ensure you have a steady cash flow in your later years. For instance, if you invest $100,000 in a fixed annuity at age 65, you might receive monthly payments of about $500 for the next 20 years, depending on your contract terms and interest rates at the time.

Common misconceptions about annuities include the belief that they are only for the wealthy or that they come with high fees and penalties. While some annuities do carry high costs, there are many low-cost options available. Additionally, people often overlook the potential tax advantages. The earnings in an annuity grow tax-deferred until withdrawal, potentially allowing for greater accumulation of funds.

It's important to understand the types of annuities—fixed, variable, and indexed—and how they fit into your overall retirement strategy. Fixed annuities provide guaranteed payments, while variable annuities can fluctuate based on the performance of underlying investments. Make sure to read the fine print, as some contracts come with surrender charges if you withdraw funds early.

The key takeaway is to evaluate your financial situation and retirement goals before purchasing an annuity. Consider using an annuity calculator to estimate potential payouts and assess whether this product aligns with your long-term financial plan.