How to Buy Deferred Annuities

For those that are unfamiliar, annuities are a financial tool that allows people to invest either one large, or several small sums of money in order to start receiving a return in the form of a constant flow of income.

In the past, large amounts of money were needed in order to qualify for an annuity, but with the advent of the 20^th century, financial entities sought to make this investment tool available also to anyone with insufficient funds to afford paying one lump sum of cash. This is how deferred annuities were born.

The concept behind deferred annuities is that it requires just small amounts of money that have to be paid regularly by the beneficiary over either several months or years. Simultaneously, the financial entity gathers all these payments and invests the accumulated amount in order to increase it with the gain of an interest rate until it reaches the amount needed to issue the periodical payments to the contract holder. These two very distinct phases are known as the accumulation phase and the distribution phase.

One of the advantages of deferred annuities is the great liquidity that they offer, allowing beneficiaries to withdraw up to 10% of their deposits yearly without any penalty. However, any withdrawal while the beneficiary is still 59.5 years or under will incur in a 10% penalty by the IRS.

Also, another advantage of deferred annuities is that, thanks to their accumulation phase, the accumulated capital can take advantage of tax-deferred benefits, which protects the accumulated investment until the moment when it starts to be distributed.

Deferred annuities are also excellent for long-term investments precisely because they let you enjoy tax-deferred benefits, which in turn lets your investment accumulate profits over time with no loss.

Here are some things to consider about deferred annuities:

First of all, deferred annuities won’t start paying until all the deposits for the annuity are payed for, this type of annuity is highly recommended for those who are not in urgent need for receiving periodical payments. That is, for people who are still planning their retirement and have some years ahead in which to let the building capital increase and profit from high interest rates. On the other hand, those looking to receive lifetime payments promptly and who can afford to pay a big sum of cash at once, should look for other annuity types, like fixed annuities for example.

Also, since deferred annuities build over time with deposits made by the contract holder, it can be hard to estimate future earnings accurately, which is why those who would prefer to know this in order to better plan their retirement, would do better by considering a fixed annuity instead. If you do decide to go with a fixed annuity, make sure you lock in your fixed annuity rates quick as the rates fluctuate a lot throughout the year.

And for all its features and the benefits it enjoys, deferred annuities have become not just one of the preferred methods for planning a retirement, but also a favorite tool for all types of investors.

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