Everyone wants to have the money and ability to retire early. In fact, the entire FIRE movement is based on this concept. (That’s Financial Independence Retire Early movement, for the uninformed.)
One of the ways in which someone can attain financial independence and early retirement is through smart investing. And there are few better investment opportunities than in annuities.
How do annuities work? What are the different types, and what are their pros and cons? Here’s what you need to know about this means of eventual passive income.
What Are Annuities?
In order to answer the question “how do annuities work”, one must first understand what they are. In general, annuities are a type of insurance product. Once you hit retirement age, they can provide you with either a lump-sum payment or a slower stream of income. You can pay for these annuities either in a lump sum or through a series of premium payments.
Understanding the Types of Annuities
There are three major types of annuities that you need to know about. These types of annuities are as follows:
- Fixed annuities, which accrue and pay out at a set interest rate, regardless of market volatility
- Variable annuities, where the interest rate you receive can vary depending on the state of the market
- Indexed annuities, which offer the protection of fixed annuities and some of the benefits of variable annuities
These three terms cover the major types of annuities you can get from insurance companies. However, while annuities are an insurance product, they aren’t part and parcel of a life insurance policy. A life annuity only pays you while you live, while life insurance will cover your expenses after you die.
Deciphering the Pros and Cons of Annuities
Annuity payments can be an exceptional income stream once you’ve decided to retire. However, there are some definite pros and cons of annuities that you need to keep in mind before you decide to invest in them. Some pros and cons you may consider include:
- Pro: You don’t have to pay into annuities indefinitely
- Con: Your annuity payouts depend on the insurer’s ability to cover them
- Pro: Annuities can prevent you from running out of money in retirement
- Con: You may need to pay fees in addition to your normal payments
One last thing to keep in mind with regards to annuities is that the rate of repayment can vary depending on the policy or company you choose. If you need to adjust that rate or access your funds before retirement, you can contact a company like right way funding to get the money you need.
How Do Annuities Work? Let’s Review
So, how do annuities work? Annuities, regardless of type, work by repaying you the payments you put into them in retirement. They can be affected by the stock market rate and may require certain fees. However, they can provide you steady income when you’re done working.
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