Understanding Annuities: A Guide to the Basics

Retirement With/On Purpose

In the first part of a series on annuities, host Trevor Lawson aims to demystify this often misunderstood financial instrument. Drawing on insights from a Morningstar article, he defines a basic annuity as a contract with an insurance company where a lump sum of money is given in exchange for a stream of income over a lifetime. Trevor explains that annuities are gaining favor as a replacement for pensions, which are becoming a thing of the past, because they provide a guaranteed income that can help cover basic living expenses, regardless of market fluctuations. He also differentiates between various types of annuities, including deferred annuities, variable annuities, fixed-indexed annuities, and registered index-linked annuities, and discusses their tax implications, noting that gains are tax-deferred but taxed as ordinary income upon withdrawal. He concludes by advising listeners to consult a fiduciary and check the financial strength ratings of the insurance company before investing.

Reference: https://www.morningstar.com/retirement/what-you-need-know-about-annuities

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