Annuities make it very easy to build retirement income streams as they allow for accumulated assets to grow without getting taxed on that growth prior to making a withdrawal. A popular option among pre-retirees and those already in retirement, annuities are contracts that promise to make periodic payments to the investor for an established amount of time and at a particular rate of interest. This level of predictability helps calm fears of market volatility. However, the amount of those return payments ultimately depend on the amount of the initial investments, the type of annuity chosen, the length of time that has passed, and the performance of the market.
Sold or backed by an insurance company, there are various types of annuities that exist and all with slight variations that may or may not appeal to each investor, depending on his aversion to risk. Fixed annuities for example, offer a predetermined rate of return offering greater predictability and a sense of certainty, of say 3% per year – which is not taxed until the distribution of those monies. This may be lower than the market growth over several years, but it is enough to keep pace with inflation, and it provides the average investor an opportunity for moderate income growth that is tax free. Further, these annuities can deliver a higher rate of return to their owners when compared against the rates of CDs or similar savings vehicles and protect the investment from yearly taxation.
With annuities, the investor can get his funds back when he retires in a percentage that is entirely based on his discretion and on his fluctuating needs from year to year. Further, he can either elect to be paid out all at once in one lump sum or in installments for period of time, say 10 to 30 years. For example, an investor can, at the age of 65, decided that he will withdrawal 7% a year for the next 25 years from his account. The longer the investor waits to make good on those withdraws, the more percentage or amount he would be able to take each month.
Building retirement income through various annuity accounts can create periodic paychecks that the investor knows will be there for a particular time period. A portfolio with several annuity accounts can all have various distribution or pay days that can supplement other investments the investor has made. With the predictable fluctuations in the market, fixed annuities generate the attention of conservative and frugal investors who would like to foresee a steady and dependable rate of return.
Unlike some other saving vehicles, some annuities allow for added security when the investor dies, as the remaining payments can be passed to a beneficiary. Annuities are backed by gathering the money from many investors into a pool and delivering payouts from that pool. Due to their structure, they offer a more safe return on their initial investment and are particularly beneficial to those retired or near-retirement, as they have less room for wide market fluctuations. When the stock volatility displays itself, as it often does from time to time, those investors who have place some of their earnings in fixed annuities will maintain a steady stream of income and negate much of the financial losses that traditional stocks may experience.