What is An Annuity (and How Annuities Work!)

Annuities are basically contracts issued by financial institutions where funds are invested with the goal of paying out a fixed stream of income to you later on.

Their main purpose is to help out individuals in retirement. With an annuity, you’re very unlikely to outlive your savings as you’ll constantly have a series of payments coming in.

While annuities can be perceived as having large up-front costs and also tedious early withdrawal rates, they can be a great option for people looking for a guaranteed stream of retirement income.

The reason these financial institutions are able to pay out guaranteed money to you is because you need to fund it first. It’s kind of like social security: steady cash flow until the individual passes away.

The period of time during which an annuity is funded is called the accumulation period. This is where you need to give money to the financial institution. The money is then in their management, and they can do what they want with it.

Ideally, they will try to invest the money and grow it to reach their investment objectives so that they can make a profit even after funding your payments.

The period of time during which the financial institution pays you money is called the annuitization phase. This is where you get guaranteed payments every month. You basically get your money back!

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