If you’ve ever received a settlement, inheritance, or any other large sum of money all at once, you might have considered putting it all into an annuity. There are many companies out there that will solicit this service, but for some people, that just drives them away from considering it. Using this method to protect and grow your money can be very beneficial, though. Knowing what to look for in a situation like this is a good skill to have and it can end up helping you a lot financially. Let’s take a look at the basics and see how this works and whether or not it will work for you.
First, you need to take an honest look at yourself. If you were suddenly wealthy, what would you do with the money? If you knew you could go to the store and buy $10,000 worth of merchandise and not be hurt by it, would you? What if you did this a few times, though? Would it begin to cause a financial issue? This is the problem with sudden wealth; spending a few dollars here and there isn’t an issue until it starts adding up. If you were to find yourself with $1 million, you could easily spend a few thousand and not see an impact. But if you did it every day for months, you might find yourself broke. This is where annuities step in. If you choose to go this route, you would invest your money as one lump sum. Usually the method would be through a fixed rate annuity because of the immediate nature of things. You will want that extra security layer so your money is not attached to the value of the stock market at all.
You want to have an immediate annuity because you want to start receiving disbursements before the end of the year. Let’s say you have $1 million. You find an immediate annuity with a favorable fixed rate and hopefully a bonus of some sort. Then, after a few months, that money starts coming back to you in the form of a monthly check or direct deposit from the insurance company.
Why would you choose to use an annuity? Remember the example we looked at above? If you were reading that and thinking that that might be something you would do, you need to do something to protect your money. Yes, having expendable income is great, but you probably don’t want to just blow all of the money at once. Having the annuity in place prevents this from happening. It locks your money up and gives it to you in small chunks instead. Your money can grow a little bit, and you will not be able to get more than a month’s worth at a time without paying a hefty fine for the early surrender of the policy. Not only does this method protect you from yourself, it allows you to make money, too, thanks to the fixed interest rate that is being applied as you receive disbursements.
The downside to using an annuity is that you cannot receive payments until you are a certain age. If you are in your 20s, 30s, or 40s, this might not be the best method for you if you do not have a reliable source of income. The alternative would be to set aside what you need to live on and use CDs to stagger your money and income and put only a portion into annuities. If you have questions like these and are not sure what’s best for you, be sure to contact a financial advisor.