subject: What Is A Retirement Annuity? [print this page] A retirement annuity is like having insurance for your retirement. It actually takes the form of an insurance policy, and the action required for the benefit to pay out is the day you retire. Retirement annuities often take the form of supplemental income for other retirement plans you have made. It is not uncommon for an annuity to supplement other retirement plans such as your 401(k) and retirement benefits from your job. They can also be used as your sole income if the payments are large enough.
How Does it Work?
The annuities work much like other insurance products. You will pay your premium from whenever you purchase them, until the day you will be or intend to retire. The company will invest the money in different interest bearing financial products, depending on the level of risk you are willing to take on. More risk can return much higher, but could lose money. Lower risk will return lower, but is guaranteed not to lose value. Upon the day you retire (or whatever date you set for the payoff) the account annuitizes and you start getting payments out of the account, instead of paying into it.
You can use this money for anything you like: mortgage payments, living expenses or taking trips around the world. If you have planned accordingly, your retirement annuity could fund your retirement dreams.
High Risk, Low Risk?
Retirement annuities come in three different flavors: You can choose low risk, medium risk, and high risk. The low risk accounts are based on lower risk accounts that will not return that high, but will be guaranteed not to lose value over the time of the account. They would not return a whole lot higher than you put in, but they will never be lower in value than you put into it. Medium risk accounts combine aspects of both the high and low risk accounts, putting a portion of the money into interest bearing savings accounts, and a portion into higher risk investments. This style guarantees you will not lose much, if any, of your money. High risk accounts are based entirely on investing almost all of your premiums. You will likely get a much higher return on your investment, but there is a very real chance that you could lose a good chunk of it as well.
The type of account you choose is entirely up to you. If you have planned your retirement well and know that your other plans will be able to support you after retirement, you may want to take the chances in a high risk account. Otherwise, you may choose a low to medium risk. Shop around, do your research and be sure that retirement annuities are what you need before buying.
by: Katherine Smith
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