An annuity is a financial product where you give a lump sum of money to an insurance company or financial institution, and in return, they agree to pay you regular payments for a certain period or for the rest of your life.
The idea behind an annuity is that it provides a steady stream of income over time, which can be helpful, especially in retirement.
Simple Example:
Imagine you are 65 years old and you have $100,000 saved up. You want to make sure you have a steady income for the rest of your life, and you don’t want to worry about running out of money.
What you do: You use your $100,000 to buy an annuity from an insurance company.
What you get: The insurance company promises to pay you $6,000 every year for the rest of your life, no matter how long you live.
So, if you live for 30 more years, you’ll receive $6,000 each year for those 30 years. Even if you live longer than expected, like 40 or 50 years, you’ll still keep getting the $6,000 every year for as long as you live.
Key Benefits of an Annuity:
Guaranteed Income: You don’t have to worry about running out of money. The annuity ensures a regular income, either for a set number of years or for your entire life.
No Investment Risk: The insurance company takes on the risk, so no matter how the market performs, your income stays the same.
A Simple Way to Look at It:
An annuity is like a “paycheck for life.” You pay a lump sum upfront, and in return, you get regular payments for as long as you live. It’s a great way to make sure you have money coming in every month or year, without needing to manage investments.
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