By Kelly Robinson, Spring 2016 Student Intern
Unless you are nearing retirement or have come into a large sum of cash, you’ve probably never needed or thought about, an annuity. The recent spike in Powerball winnings had people around the country asking themselves whether they would take the lump sum or the annuity, but what exactly is an annuity and how does it work?
In the most basic sense, an annuity is a sum of money paid to someone at regular intervals, typically yearly. This is how most lottery winnings or large cash settlements from lawsuits are sometimes paid out. Historically and in modern times, annuities are used as a way to provide a steady stream of income during retirement, to ensure that retirees still have a steady source of income as they continue to age.
In short, it works like this: you purchase an annuity and you have a choice of paying via a single lump sum or via a series of payments known as premiums. You can then choose to continue saving and defer payouts to a later date (called a deferred annuity), or you can have your payouts start immediately (creating an immediate annuity). Finally, you have the choice of payout via a lump sum or a series of payments.
Annuities come in different forms and can have various features, making them complex products for investors to understand. There can also be substantial fees and commissions associated with the annuity, so it really does pay to try to understand and gain as much knowledge as you can about them before you invest. Because of their complexity, we will be spending the next several weeks examining the various forms they take, their potential benefits, drawbacks, and how they are regulated.