What is an Annuity?

An annuity is a financial contract between an individual and an insurance company, in which the individual makes a lump sum payment or series of payments to the company, and in return, the company agrees to make regular payments to the individual, typically starting later in their life.

There are two main types of annuities: fixed and variable. A fixed annuity guarantees a fixed rate of return on the individual’s investment. By contrast, a variable annuity’s return depends on the performance of the investments chosen by the individual.

Advantages

One of the main advantages of an annuity is the potential for steady, reliable income during retirement. Annuities can provide a stream of income that can last for the rest of an individual’s life, which can help ensure that they have enough money to cover basic living expenses and avoid outliving their savings.

Another advantage of annuities is that they can provide tax advantages. Annuity payments are typically taxed as ordinary income, which means that they may be taxed at a lower rate than other types of income, such as interest or dividends. Additionally, some annuities may be eligible for tax-deferred growth, which can help an individual to accumulate more savings over time.

Disadvantages

On the other hand, annuities also have some downsides. One potential disadvantage is that annuities can be complex and difficult to understand, which can make it challenging for beginners to evaluate their options and make an informed decision. Additionally, annuities often have high fees, which can eat into the individual’s returns.

Conclusion

In summary, annuities can be a valuable tool for retirement planning, however, it’s important for beginners to understand the potential benefits and drawbacks before making a decision. If you are considering an annuity but need more information, contact Tostrud & Temp in La Crosse, WI. Our team of professionals provides financial advice and support and can handle all your financial questions.