Annuity. Maybe you’ve never heard the word, or you have heard the word, but have no idea what it is. This article will help you understand what an annuity is and the questions you should ask yourself to find out if an annuity is right for you.
What is an annuity?
The Merriam-Webster definition is:
annuity – noun
- a sum of money payable yearly or at other regular intervals
- the right to receive an annuity.
- a contract or agreement providing for the payment of an annuity.
So, now we know the basic definition of an annuity has something to do with getting income or payments at regular intervals. Basically, a paycheck. That original version of annuities has been around for 2,000+ years. Today they are called Single Premium Immediate Annuities (SPIA) or immediate annuities. But there are several more types of annuities available today. Going forward we are going to focus on fixed annuities only.
While all annuities have an option for income, many annuities are used as an alternative to other savings options. To put it simply, they are another place you can put your money and have it “do something”.
What can fixed annuities do?
- Protect your money.
- Guarantee a return.
- Guarantee income.
Let’s break down each point.
Protect Your Money
A fixed annuity is designed so that if you keep your money in the product for the agreed upon time, you will not lose any money. This is different than other types of accounts like mutual funds or money markets where those guarantees are not available.
Guarantee a Return
Without getting into the weeds of specific product types, there is a type of annuity called a Fixed-Rate or Multi-Year Guaranteed Annuity (MYGA) that will guarantee a specific interest rate for a specific number of years. There are also Fixed-Index Annuities that guarantee a rate based on a certain percentage of stock market indexing returns. A guaranteed return is one of the biggest reasons people buy annuities.
Guarantee an Income
As we have already discussed, a SPIA guarantees income. There are other options that guarantee income such as income riders attached to deferred annuities, or interest withdrawals from a MYGA.
Now that you have a basic understanding of what an annuity is and what it can do, let’s get back to the main question.
Who should buy an annuity?
Annuities should be purchased by someone who wants the guarantees the annuity can provide.
- Do you need to guarantee income for a specific time frame or maybe your lifetime?
- Do you want to earn a certain interest rate on your money, and you are OK not using it for a period of time.
- Are you more concerned about not losing your money than getting the highest growth rate?
- Do you want to diversify your portfolio?
If you answered yes to any of these questions, an annuity might be right for you.
