What is an Annuity, and are they beneficial for me?

According to Wikipedia, a few other research sources, and the many Continuing Education classes I have completed, annuities have existed in their present form only for a few decades. The idea of providing a stream of income for a family or an individual dates back to the Roman Empire. The Latin word annua meant annual stipends. Individuals would make a single large payment into the annuity and then receive an annual payment each year until death, or for a specified period of time.

One of the earliest recorded uses of annuities in the United States was the Presbyterian Church in 1720. The purpose was to provide a secure retirement to aging ministers and their families and was later expanded to assist widows and orphans. 

In 1812, Pennsylvania Company Insurance was among the first to begin offering annuities to the general public in the United States. Some prominent figures who are noted for their use of annuities include Benjamin Franklin, who assisted the cities of Boston and Philadelphia; Babe Ruth avoiding losses during the great depression, and O. J. Simpson, protecting his income from lawsuits and creditors.

There are five major categories of annuities:

• Fixed annuities
• Variable annuities
• Fixed-indexed annuities
• Immediate annuities
• Deferred annuities.

I would look into each type before making a decision on which is best for you. There are two main types of annuities: cap rate and participation rate.

Most retirees prefer a single premium immediate annuity, also called an immediate fixed annuity. In most cases, annuities offer monthly payments that begin shortly after they're purchased with a lump-sum payment. 

Did you know that Annuities can spare you from paying taxes in some cases?

Payments from a qualified annuity are fully taxable as income. This is due to the fact that no taxes have been paid on that money. However, annuities purchased with a Roth IRA or Roth 401(k) are tax-free if certain requirements are met. So, if you've saved using one of those vehicles, you can avoid taxes. 

Is it wise to avoid annuities?

Long-term contracts, loss of control over your investment, low or no interest earned, and high fees are the main disadvantages. Furthermore, annuities offer fewer liquidity options, and you must wait until age 59.5 to withdraw any money without penalty. You can avoid these penalties and restrictions by using other financial vehicles. And who likes restrictions?! 

What is the impact of an annuity on my Social Security?

Social Security does not count pension payments, annuities, or the interest or dividends from your savings and investments as earnings. There is no reduction in your Social Security retirement benefits as a result of them.

How long does an annuity last?

Most annuities allow you to choose whether your payments will last for a set period (such as 20 years) or for an indefinite period (such as your lifetime or your spouse's lifetime).

Is it possible to withdraw money from an annuity?

Withdrawals from annuities can trigger one of two types of penalties. A surrender fee is charged by the insurer issuing the annuity if funds are withdrawn during the accumulation phase. If the annuity holder is under the age of 59 and a 1/2, the IRS charges a 10% early withdrawal penalty.

Conclusion:

An annuity is a contract between you and an insurance company in which the company promises to make periodic payments to you, starting immediately or at some future time. If you've researched annuities and the carrier you are purchasing from and you like everything you've learned, then it will do as it is designed. If you'd like more flexibility, fewer taxes and penalties, and the ability to use your money while saving for retirement, then this is not the product for you. Annuities are safe and worthwhile products, but they are not for everyone and they do not build wealth. 

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