What Makes Annuity a Good Investment?

What Makes Annuity a Good Investment?


Investing well is important in building wealth. It’s not enough to just have money invested. You also need to make sure that your investments are good ones. One way to do this is to hire a professional. Investment management in Orlando can help you by choosing the right investments for you. However, it’s still a good idea to be financially knowledgeable yourself so that you can understand what your investment manager and financial advisor are doing for you.

What Is an Annuity?

An annuity is an amount of money that is paid to someone at regular intervals and at a fixed rate. For example, someone could leave you an annuity of $2,000 per year in their will. An annuity is essentially a contract with an insurance company. The person who takes out the annuity in the first place pays a lump sum all at once to the insurance company, which then disburses that money in regular payments.

What Is the Purpose of an Annuity?

The purpose of an annuity is to provide a steady stream of income. You could set one up for another person in your will. Alternatively, you could set one up for yourself in your own retirement.

Why Is an Annuity a Good Investment?

An annuity isn’t going to generate the same amount of growth as an investment portfolio. However, if you have a lump sum of cash right now and want to guarantee a steady income stream later, it can be a good idea to set one up. Investments can carry risk and an annuity could help to reduce that risk and boost your retirement income. Taxes are deferred on an annuity, but they aren’t tax-free, so you would have to pay taxes on the distributions as you receive them.

There are three different types of annuities and which is best depends on how much risk you want to take.

Fixed Annuities

Fixed means that the amount paid out at each distribution is the same. You can have an annuity begin to pay out immediately or have the payments deferred until later. While fixed annuities can be great for their predictability, they’re not necessarily as good of an investment because the returns you can get are limited.

Variable Annuities

A variable annuity will still pay out regularly, but how much it pays depends on the returns of mutual funds. For this type of annuity, your lump sum would purchase mutual funds and how much the annual payment from the annuity was would depend on what those funds were worth. There’s a greater potential for higher returns, but at the same time, there’s also a greater risk of having lower payments.

Indexed Annuities

If you want higher returns but also lower risk, an indexed annuity might be the right option. It’s a middle-ground between a fixed annuity and a variable annuity. With this type of annuity, you’ll still have a fixed minimum payment. However, you might end up with higher payments if there are higher returns.