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What is an annuity? An annuity is an investment product that pays out a steady stream of income over time during retirement. When you purchase an annuity, usually from an insurance company, you agree to make a lump sum payment up front, or regularly scheduled payments at agreed-upon intervals. In exchange, you are guaranteed a fixed payment for a particular period of time: either a set number of years or until you or your spouse dies, depending on your policy.
The amount you are paid out by the insurance company is called a distribution. The contributions you make are invested by the annuity company and grow until you begin taking distributions. As you are the one receiving the distributions, you are also responsible for paying the taxes, though usually only on the growth portion of your money.
The annuity contract sets the age the payments will start, the amount of each payment, what the payment intervals will be, and many other details. There are many types of annuities. Here are a few:
- Fixed
- Variable
- Immediate
- Deferred
- Equity Indexed
Choosing an annuity depends on the amount of money you are looking to have in retirement as well as the amount of risk you are willing to take. The ultimate goal of any annuity product is to provide stable, long-term income for the holder.