Is an Annuity Right for You?

I had always heard of the term “annuity”, but I never really understood what it was until the investment option was coyly mentioned to me by my accountant since I’m in my early thirties, and annuities are typically for older people who don’t have as much time left for their money to grow. They’re really safe, but they also don’t yield as much as an aggressive stock portfolio could in the same time period (if it does well, that is).

The difference is that annuities are guaranteed income after you’ve had them for a while, and they also pose fees and penalties if you should need to draw on any of the money before the annuity “matures”.

But how does an annuity actually generate income for you, by what mechanism in other words? That was really my question. I guess I just wanted to understand how this financial instrument worked, and why I should believe that it would generate money for me seemingly out of thin air simply by me keeping it with the company for several years.

The annuity is sort of like a whole life insurance policy, only you really aren’t getting life insurance, you are getting a relatively low yield investment that is set up to pay you disbursements in your retirement age that are supposed to be very safe and very reliable.

Nothing too exciting, really just an investment instrument where you are basically giving the insurance company a lump sum up front and they are doing investments with your money (most likely by highly skilled employees) and they are dragging interest off your money in some convoluted way, but in return, when the annuity matures, you can draw monthly payments off of the investment account.

An annuity can be set up to give you payments on a monthly, quarterly, or weekly basis, depending on how the individual investment is set up. There are two types of annuities to consider. One is called a fixed annuity. This is where you get fixed payments no matter what on the set dates that have been determined. The variable annuity gives out payments based on the performance of the investment, so it could theoretically pay you out more or less, depending on the performance of the fund.

You should definitely do your research before investing in an annuity, because some really do offer better conditions than others, and some have much higher fees than others, so it’s best to be educated on what the best fund for you can be, based on your situation.