What Are Annuities, And How Do They Affect Retirement Planning?

An “annuity” is a set of fixed payments that are made over a specific time period. The most common annuity is made quarterly. (Quarterly annuities are made over the four quarters of a year or every three months.) These annuities might be variable annuities which are regulated by the Securities and Exchange Commission, or they might be fixed annuities, which are not regulated by the SEC.

Classic Fixed Annuity

The classic fixed annuity are government bonds. These bonds pay a fixed quarterly rate over the life of the bond. Government bonds are considered one of the safest investments, because you are investing in the ability of the United States government to pay back the price of the bonds. The amount of money in the bonds grow each quarter, due to the annuities payed on them.

Given that many fixed annuities are government-controlled, these annuities are not regulated by the SEC. There is no reason for it. Given the steady growth in fixed annuities and the safety of the investment, government bonds have been a traditional means prudent Americans save for retirement. Keep in mind that government bonds and certain other fixed annuities are safe, but don’t pay out the interest rates that many other, more dynamic investments pay.

Variable Annuities

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Variable annuities allow annuity-holders to invest in money markets, so the fixed annuity is regulated much like other money investments are. The “money market” is different from a stock exchange, mainly because the money market involves short-term borrowing and lending (usually 13 months), while the stock market involves a long term borrowing and lending of money (or investment of cash). The money market generally the buying and selling of treasury bills and commercial paper, and the unit of trade is “paper”. Large finance corporations get financing through the money market.

What is an Equity-Indexed Annuity?

An equity-indexed annuity is an annuity in another tax-deferred annuity with a credited interest payments are linked to one of the big equity indexes, such as the S&P 500. This equity index annuity exists as a contact with an insurance company or an “annuity company”. The insurance policy is that these equity-indexed annuities guarantee a minimum interest rate to those who hold them to the end of the term (which can be anywhere from 3 years to 16 years). The minimum annuity rate is usually 1% to 3%. Equity annuities can pay more than bonds, CDs and money market accounts, but usually aren’t going to return as much as market investment returns (invested in a sound way).

Equity-indexed annuities tend have “call options”, which allow a person to invest more after a certain term (usually one year). A person is not obligated to invest more, though.