Even experienced investors may shy away from them, but annuities
can be valuable additions to many retirement programs.
Even experienced investors may shy away from them, but annuities can be valuable additions to many retirement programs. An annuity is simply a contract with an insurance company or other financial institution. You give the institution money, which it invests and repays later with interest or other earnings. The contract’s terms determine when and how much you pay in and withdraw.
An annuity can be immediate or deferred. When you buy an immediate annuity, you pay a lump sum and immediately begin receiving a check each month. In exchange for a lump sum, you’re buying an “instant pension” that lasts for the rest of your life or, in the case of a joint-and-survivor annuity, the lives of you and another person (usually your spouse).
Deferred annuities are bought in installments over time. When your payments and any holding periods are completed, you can leave the money in to continue earning, or you can make a lump-sum withdrawal, sporadic withdrawals or monthly withdrawals for life or a fixed number of years.
There are no tax deductions for payments into deferred annuities, and there can be penalties if you withdraw your money too soon. Consider these contracts only after fully funding retirement plans where contributions are deductible, such as a 401(k) or IRA. However, once paid, annuity contributions accumulate earnings tax-deferred, allowing added growth for your nest egg.
Like all investments, annuities should be carefully researched before purchase. We will be happy to guide you further in determining whether an annuity might be right for you.
Doug Herring is a manager at the accounting and business consulting firm of Bianchi, Lorincz & Company located in downtown Hollister.
