What Is An Annuity?

In addition to providing a consistent income, annuities offer a number of benefits when incorporated into your retirement plan. Some of these benefits include:

A secure lifetime income during retirement, which can help alleviate concerns about outliving savings

Peace of mind for retirees, knowing that they have a reliable source of income

Potential tax advantages, as annuities can offer tax-deferred growth

Flexibility in choosing how to receive income, with options such as lifetime payments or a lump sum

These benefits, including the death benefit, make annuities a valuable tool for retirement planning.

Furthermore, the guaranteed lifetime income from annuities ensures individuals do not have to worry about depleting their retirement savings. The consistency of income for retirees is particularly valuable if there is uncertainty about the adequacy of other savings to cover regular expenses.

Tax Deferral on Growth

A major perk of annuities, particularly deferred ones, is the prospect of tax-deferred growth. Earnings on a deferred annuity are tax-deferred, meaning taxes are not paid until funds are withdrawn or payouts begin. This allows for significant growth between contribution and withdrawal.

When income payments from annuities are received, they are taxed as regular income, and individuals are required to pay taxes on them. If the annuity was purchased with after-tax dollars, only earnings are taxed when payments are received. This tax deferral can be beneficial for many investors, especially those in higher tax brackets.

Lifetime Income Assurance

Another benefit of annuities is the guaranteed lifelong income they offer. Annuities offer a solution to longevity risk by ensuring that individuals cannot outlive their income stream. In other words, the income from annuities lasts as long as you do, even if you live beyond your original principal investment.

The amount of annuity payments varies based on the chosen payout option, such as life or joint-life annuitization, offering different levels of income duration and guarantees. For instance, fixed annuities provide predictable, steady payments, while variable annuities offer payouts that fluctuate with market performance.

Flexibility in Premium Payments

Annuities also provide adaptability in premium payments. They can be purchased with a single premium payment, which is a lump-sum payment. However, for those who prefer spreading out their payments, annuities also allow for periodic additional payments to the initial premium.

Annuity holders often have the option to determine the frequency of their premium payments—whether monthly, quarterly, or annually. What’s more, premium payments may be modifiable throughout the life of the annuity contract, providing the ability to adjust contributions as financial positions change, while also considering the claims-paying ability of the contract.