It’s a simple fact of life that we will all get older and eventually the other we need to retire. We typically don’t want about that until it’s too late, but with careful planning we can make our retirement easier. One thing that can help us be better prepared for retirement age is to understand the basics of an annuity and invest in our future.
(Update: These days I get a lot of questions about secure investments, and this article has driven a lot of question on annuities. That’s why I decided to start a separate website called Annuities Explained so after reading this article please visit that site dedicated totally to annuities.)
Annuities are basically the opposite of an insurance policy. An insurance policy is intended to provide money to our loved ones in the case of our death. An insurance policy provides the loved ones with money to handle bills and financial concerns when we die. An annuity is created to provide us with money before we die.
An annuity is basically a series of payments made at predetermined intervals over select period of time to the owner of the policy. Or said differently an annuity is a living insurance policy. One of the things we all think about his life insurance but we often forget about living insurance. With an annuity you take out a policy and are required to pay monthly installments on this policy until it reaches the level of maturity. This money actually gets set aside similar to the fashion a savings account works. This money accrues interest and the funds become available to us at preselected period of time.
As mentioned before an annuity is basically a living insurance policy that has been arranged between the insurance company and the policy owner. Rather than paying out the money after the policy owner dies it distributes the money to the policy owner while they are still alive. Basically this equates to a policy owner investing in their future and preparing for retirement.
The money that exists in a matured annuity is paid to the owner of the annuity via installments. It is these installments that begin at a preselect period of time. For example, an annuity may be set up to start paying the owner when they reach the age of 62. These installments are typically paid on a monthly basis and are spread out over a large number years.
The retirement plan that is provided by many employers is a form of an annuity. Typically what happens with a job-related annuity or 401(k) plan is an employer makes the annuity plan available to the employee. Employees grant the employer the right to take out a preset amount of money from his paycheck and deposit into his retirement annuity.
Most employers encourage employees to invest in the annuity policy and consequently will match up to a set percentage of the money the employee has set aside. For example, an employer may provide a 401(k) or annuity retirement plan to its employees and Employee A decides that they want $100 a pay period set aside. The employer who agrees to give $. 50 on the dollar up to a maximum amount pay $50 into Employee A’s annuity account. This money remains in the account until the time employee A retires and starts to draw against the annuity.