Your payments into any annuity are referred to as premiums because an annuity is a life insurance product. Payments for insurance policies are known throughout the industry as a premium.
With that said, how do you make your premiums work best for you? The earlier you pay a premium, the more beneficial it is to you. This is because of the interest that is paid into your account. If you have a fixed annuity with a 3 percent interest rate, you are gaining 3 percent interest on your premiums and any residual interest that has accumulated on the annuity. You are also going to gain interest at the above rate on any money that is tax-deferred.
If you are not convinced of the importance of investing early on in your professional career, look at the below example:
Assume Person A invests $2,000 at the beginning of each year for eight years. Person B, who is entering the professional workforce at the same time, doesn’t want to start investing until they have more money. So they don’t invest anything in those first eight years. At the conclusion of the first eight years, Person A stops investing in their annuity and Person B begins. Thirty nine years later, who do you think would have the most money? So Person A contributes a total of $16,000 while Person B contributes $78,000 over the course of the 47 years. For the purpose of simplicity, we will assume that the interest rate is a uniform 10 percent.
The answer is Person A. Because of compounding interest, Person A has a nest egg of over $25,000 at the eight year point while Person B has nothing. At the end of the 47 year total period, Person A will have $1,035,161 and Person B will have $883,185.
Paying your premiums early on in life is essential to financial success down the road. Waiting only eight years put Person B at a huge deficit, one that he was never able to compensate for. If you want to have a good retirement, making plans early on will greatly increase your financial well being.