In the world of investments, the term “annuity payments” is a phrase that has generated a lot of heat over the past several years. If you have done even a little investment strategy research, you have undoubtedly come across the phrase quite a bit. But what does it mean?
The Essential Information
In order to be familiar with annuity payments, you should be familiar with what an annuity is. In essence, an annuity is a financial item that is designed to receive and grow an individual’s funds at one point in time with the intention of paying them out at a later time. The primary reason that a person would want to set up an annuity would be to provide a steady cash flow during their retirement years.
The monthly annuity payment that a person would receive would greatly depend on the following key factors:
- How much funds are entered into the annuity
- The period of time in which the funds are entered
- How quickly the fund may be depleted in a given number of years
These factors do dictate that a measure of due diligence take place now in order to maximize the preparation for the days to come. There are several resources that are available online in order to help you prepare properly, from updated news items that may affect your annuity investment to calculators that you can utilize in order to estimate the amount of funds you would need to invest in order to live comfortably down the road.
The beauty of annuity payments is that its structure of distribution is flexible based on your needs. You can receive your annuity payments on a monthly, quarterly, or an annual basis, or you can simply receive your annuity in one lump sum.
There is also some flexibility to annuity payments from a taxation standpoint; it chiefly depends on how you initially invest your annuity. If you use pretax money from an IRA or a 401(k) to buy an annuity, than all of the payouts that you receive will be fully taxed. If you use post-tax money from an IRA or a 401(k), a portion of your payouts will be considered tax free. Regardless of what method that you use, you should be aware that there are taxes that you must account for regarding annuity payments, so plan accordingly.
The other thing to realize when you are setting up your annuity payments is that if you select a life-only annuity payment, the funds will only be paid back during the duration of your life. If you pass away suddenly after one year of receiving annuity payments, the remaining payments of the annuity will not be handed down to your heirs. That said, there are several annuity options relating to death benefits that are available to ensure that your loved ones will benefit financially should the unthinkable occur.
As with most investments, there is no definitive right or wrong way to go about setting up your annuity payments. This depends on several independent factors that depend on your personal situation. As such, it is important that you do a proper amount of research in order to ensure that whatever annuity strategy you deploy, it ideally fits your needs.
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