An annuity is a contract between you and the insurance company, and both of you are trying to get a deal. The deal is this, you will agree to payout either a series of payments or a lump sum, in exchange for a series of payments indefitely or a lump sum. And you might say, well tommy that sounds redundant doesn’t it?

You see the truth is both of you are taking a gamble. and if you are smmart and you think about an annuity as what it is, an insurance policy and not an investment then you can actually win.

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Lets break down the basics

When you agree with the insurance company to give them a series of payments

They will agree to give you a lump at the end or series of payments for usually until you die

For example:

Lets say you are 60 and just retired and you have accumulated $500k

Their something called longevity risk, the risk that you may out live your savings

If you spend 50k a year, you’ll probably run out of money in 10 years but if you give that money to the insurance company they will agree to pay you a fixed amount of money each month

So if the amount is $2400 a month, it’s a payout of about 5.76%, and it would take you almost 18 years to get your 500k back

But if you live past 18 years, then you know you don’t have to worry abbot money, because that yet will keep coming in

Tommy what about:

Taxes: that’s something you have to consider and run the numbers on

Inflation: some annuities do adjust for inflation but most just give you a fixed payments amount

Mortality risk: if you die early usually your spouse or beneficiary can get the payments but again you have to see what the terms are

Not all annuaties are Lump sum though and not all are the same

Somme annuatires are deffered and grow taxed free

Some annuaties are fixed and gurantee you a fixed return

Some are variable and have differrent invertment vehical and you can make momre money

But all annuaties have two phases the Accumulation phase and Payout phase

Somme will have you make payments or a lump sump ( accumulation phase )

And then you will be paid a series of payments or a lump sum ( payout phase )

Who is this for exactly

Well I told you not to view it as an investment because its not

Its really more of an insurance against your income and assets

This way you never have to worry about your income going below a certain amount of money

Here is an example:

If I have 1 million follars, I could buy an annuaty that pays me around 5k or more per month forever

While if I had that money in the market and the mmarket turned side ways while I was in retiremnt, I could be in trouble

Alternatives and what would I personally do

Well the risk of running out of money is a big one

But if I invested into the market and took out 4% a year, I wouldn’t run out of money for atleast 33 years but the income would flucuated

My advice would be this:

Keep your cost low and have a surplus of investment

And if you feel like you need extra security, buy with a portion of your assets an annuaty

For example

If I was 60 and older and wasn’t able to make income anymore like I used to

And if had them 1M dollars, paid of home and no debt

And my cost of living was lets say $2500 per month

I could buy an annuity for 250k and guarantee an income of about $1000 per month and with the other 750k I could take 4% out and make about $2500 per month

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*Some of the links and other products that appear on this video are from companies in which Tommy Bryson will earn an affiliate commission or referral bonus. Tommy Bryson is part of an affiliate network and receives compensation for sending traffic to partner sites. The content in this video is accurate as of the posting date. Some of the offers mentioned may no longer be available. I’m an Accountant but I’m not your Accountant, always review information with your Accountant/CPA and your Financial Advisor.

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