Not Sure How Annuities Work? Here are 10 Things You Need to Know

how annuities workWhen it comes to annuities, it may feel like the odds are stacked against you. But if you understand how annuities work, you can reap the benefits for years.

How can you beat bankers at their own game?

There are plenty of industry terms to describe an annuity. We will review them to give you a better perspective.

First, let’s develop a basic understanding of how annuities work.

What is an Annuity?

According to Forbes, “An annuity is a financial product sold as a way to collect and grow funds and then later receive those funds as a steady cash flow.”

In principle, an annuity is a loan you make to a bank. That bank invests that money and pays you back on a monthly basis, with interest.

There are dozens of personal applications for an annuity. You needn’t be retiring to consider it as an investment.

10 Things You Should Know About How Annuities Work

Here are ten things to consider about how annuities work before choosing your investment.

Why Annuities Exist

Annuities date as far back as ancient Rome. In A.D. 225, a judge established an “Annua,” which was a lifelong stipend paid once a year in exchange for a lump-sum investment.

The Annua was created to help families of soldiers when they were deployed for duty.

Annuities made more appearances in the 1600s and 1800s. They were most often used to guarantee payment to individuals involved in public service or large public undertakings.

History has shown how annuities work as a practical means for long-term support. Today, they serve as practical income for people of all ages, most notably retirees.

The Best Reasons to Buy an Annuity

You may come into a large sum of money and you want to make it last. An annuity generates interest as you stretch that money over a long period of time.

You may have long-term monthly expenses that you’d like to cover. You may have flexibility in terms of what your monthly annuity payments can be. This is a way you can cover those unwanted expenses.

Annuities are usually part of a retirement plan. Retirees have monthly expenses that may no longer be covered by a salary. A long-term investment in an annuity promises regular monthly payments retirees can use for practical reasons.

Understanding Fixed Annuities

No matter the bank, there are two types of annuities to consider. There are advantages and disadvantages to both. You should consider these when creating your long-term investment plan.

Fixed annuities guarantee a set amount of payout on a monthly basis. This has the advantage of dependability. However, if the bank’s pooled investment skyrockets in value, you won’t see any of those returns.

Fixed annuities could be advantageous in a volatile market. They also provide peace of mind if the fixed payments are enough for your needs.

Understanding Variable Annuities

Banks use variable annuities to put your money into a pooled investment account similar to a mutual fund. The return on your annuity — the amount of money you make — depends on the performance of that pooled investment.

Variable annuities are more volatile than fixed annuities. Your returns could be greater if the pooled investment performs well. If it doesn’t you won’t make as many gains.

Advantages to Look For in an Annuity

As an investment, annuities can protect your principal. That means the original cash amount of your investment cannot be lost, even if you see no returns.

Some annuities allow you to lock in gains. This helps you keep earning interest even if the market is down. This adds to the security of your investment when your principal is also protected.

Generally, annuities are investments that provide peace of mind. How annuities work may differ from person to person. But they are great investments as practical assets.

Pitfalls to Avoid When Choosing an Annuity

The greatest pitfalls in buying an annuity are fees. Fees can go unnoticed to the untrained eye. They can deflate your investment without you realizing it.

Banks won’t hesitate to take advantage of your investment. You will see returns even with any fees. But those returns could substantially higher.

Partner with an investment expert to sniff out unwanted fees. Take personal responsibility for understanding your investment as well.

Investors can be hit be harsh penalties. If you have a personal emergency and need to pull from your investment, banks will penalize you for withdrawing cash.

How to Use Your Investment

Monthly payments from your annuity are cash in your pocket. You can use that cash however you choose, but there are better applications than others.

You can use your annuity payments for regular monthly expenses. These are payments you would be making anyway — why not accrue some interest while you’re at it?

You can use your annuity payments as part of a greater investment strategy. You may find advantages in reinvesting that money for greater gains.

Another application is financing a personal endeavor. If you want to travel the world without chipping away at your bank account, an annuity could help protect you.

Things to Avoid When Using Your Investments

Generally, avoid pulling out cash from your annuity. You will damage your long-term investment and incur additional fees.

Avoid large financial commitments that can’t be fully covered by your annuity payments. This is especially true of variable annuities. You may find yourself pulling out from the annuity to cover additional costs.

Choosing a Bank

The financial institution you invest with will determine your experience. You have an understanding of how annuities work. Now you should determine how you want to work with your bank.

Banks should provide regular statements about the performance of your investment. If you have a variable annuity, you will want to be attentive as to where the market is going.

You should find a bank with which you can have regular communication. If you have questions or need emergency cash, your bank should be available at a moment’s notice.

You might also look at banks with specific benefits for investors. Some banks reward investors for selecting certain plans or even additional investments.

Choosing an Investment Partner

Investment partners can help you find the best annuities on the market. You should also ensure you choose a partner that is best for you personally.

Don’t choose an investment partner that simply understand how annuities work. Companies like Hyland specialize in helping investors find options that fit their budget as well as their lifestyle.

Partners are skilled at personalizing your investment strategy. They will also ensure you get the most value from those investments.

Learn More

You can learn more about investing with Working Home Guide.

Contact us for additional tips and suggestions.