Ninety percent of Americans are counting on Social Security to fund their retirements. A recent study conducted by the National Institute on Retirement Security disclosed that only ten percent of Americans have saved enough money to allow them to retire to the life they want. Unfortunately, the average American family’s retirement asset is an unbelievably low $3,000.
There are many ways to attempt to catch up, one of which is to buy an annuity.
What Is an Annuity?
An annuity is a contract where you give a lump sum of money to a bank or investment house that manages the annuity. They promise you a fixed amount of income. Most annuities allow the buyer to select if they want annual, quarterly, or monthly payouts. Investors may also opt to take a single lump sum payment. Taking a lump sum payment terminates the investor’s relationship with the firm that issued the annuity.
According to annuity.org, you can choose from two types of annuity contracts.
Fixed annuities are contracts that guarantee the buyer a fixed sum at the end of the term. The buyer can opt for a single payout or payouts made periodically. Buyers can also defer taking any distribution. People who do this continue to earn interest on their total investment, which adds to their payout amount. If the investments break even or lose money, the face value of the contract is the amount paid. It acts very much as a bank issued Certificate of Deposit.
Like a fixed annuity, a variable annuity purchased from an insurance company assures payments on an agreed upon date. But, with a variable annuity, there is risk. Your payout is dependent on how the investment does on the market. Usually, your investment is safe as the bank normally invests your money in mutual funds that then invest your money in stocks and bonds.
Some of the advantages to a variable annuity are that you can choose to have periodic payments for life, with a death benefit at the end. When you pass on, your family continues to receive payments. The money earned by a variable annuity has no tax liability until it is withdrawn.
Using an Annuity to Raise Cash
If you are receiving periodic payments and want to pay your child’s tuition bill, selling your future payments for a lump sum might a good decision. You incur no more debt and can access your annuity money with a second chance to take a lump sum payout.
The downside of taking a lump sum is that you will receive less than you would if you choose to take the scheduled payments. The lump-sum buyer takes a portion of the transaction as profit since the buyer has to wait for his money according to the terms of your annuity contract.
A decision to sell an annuity needs careful consideration. Get advice from your financial advisor and your estate planner before making any decision. Many companies are in the business of buying annuities. Shop around for the best deal.
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