Annuity Basics
Posted on August 17, 2008 - Filed Under Finance
Simply described an annuity is money that is paid to somebody yearly, weekly, monthly or at some other regular interval. In the following we will be discussing three basic types of annuities. Annuities can be purchased as investments such as bonds or even be utilized as part of retirement payouts.
When someone retires they usually would like to collect their retirement benefit package in annuity form whether it be a pension or 401k plan. This provides an individual with a regular source of income. Let’s use Nancy as an example; she wants to invest her retirement funds in bonds, so she collects an annuity from them. She will be able to collect payments from this investment in three different ways. The first of which are fixed annuities, this is when the payment streams remain constant. For instance, if Nancy has a hundred thousand dollars and invests it in a 5 year bond with a interest rate fixed at 5% with an monthly pay out, she will receive $5000 for the year and $416 each month for the next five years. She will also receive her principle back at the maturity date at the end of the five years giving her a total of $125,000, a return of 25% on her initial investment. Typically, she would not be allowed to dip into her initial principle without having to suffer some sort of penalty. With this investment she has created a monthly stream of income.A second form of annuity payout that does not have a constant return is variable annuities. Variable annuities are usually closely linked to the stock and mutual funds markets. Depending on how your annuity is invested your variable annuity payment is correlated to market performance. Great performing periods will give you larger payouts while not so great periods will give you less on payouts. These annuities are a bit more risky due to their volatility as always taking on more risk is always related to potentially having greater gains. Similarly, Equity indexed annuities are also subject to fluctuating payouts. For instance, if she buys an equity indexed annuities tied to the S&P stock index then the performance of the stocks in that index will dictate the annuity payouts, if stocks perform very poorly or she decides to cancel the annuity she can even lose money. In which case, be sure to be aware of all the details that affect an equity indexed annuity.Annuities can be purchased through several providers either online, through your bank or even financial advisor. They have several different variations, some can be purchased out right some in installments, the payouts can be received to you immediately or you can have them deferred. Pay close attention to those that are best for your needs. Keep in mind that annuities are not FDIC insured, however, if you would like to receive regular income from an investment , retirement or otherwise annuities are a popular way to go.
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