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Besides being hard to say, an annuity is hard to understand. Annuities, however, have been around since the Romans where people would make one payment in return for lifetime payments. Roman soldiers were paid annuity payments for service. Feudal lords in the Middle Ages used annuities to finance wars and conflicts. Annuities gained traction during the Great Depression when market volatility was at an all-time high, putting people’s retirement savings in jeopardy. Wealth CAP, an online investment company, will explain annuities in this blog post. Contact us today for a full retirement income plan!


The word, annuity, comes from the Latin word, annua, which meant annual stipends. An annuity is a retirement instrument designed to give you an income stream in retirement. In essence, you are saving money now, handing it off to someone for safe keeping, and then getting it back in the future (plus interest). You contract with an insurance company to make either a lump sum payment or a series of payments to then receive them at some point in the future. Income from interest is tax-deferred, and you can’t touch the money without penalty until you are at last 59 ½. Usually, an annuity has a specific goal, such as legacy planning or long-term care coverage.


You pay in premiums during what is called the accumulation phase. When you stop paying premiums, the annuity starts paying you in the payout phase. Payouts are based on the age you are when you start receiving payouts and your estimated life expectancy, with smaller payments being made the greater the time you’re projected to receive payments (your life expectancy).


  • Immediate annuity. That being said, some annuities do pay out immediately and are called immediate annuities. Immediate can be 30 days after purchase or up to one year, based on when you want to receive payment. These annuities are popular with retirees.
  • Deferred annuity. An annuity that pays out at some point in the future is a deferred annuity.


  1. Fixed annuity. Fixed annuities pay out a fixed amount based on the balance in your account, which is usually slightly more than a CD (certificate of deposit).
  2. Variable annuity. If you want a higher rate of return, you can choose a variable annuity, that is invested in mutual funds. Similar to a 401k, you choose where you want your money invested, so you can choose safer investments versus higher-risk investments. There is no guarantee of a particular rate of return with a variable annuity. There are usually annual fees for variable annuities.
  3. Indexed annuity. An indexed annuity is tied to a market index. This is the middle-ground annuity between a fixed annuity (which is conservative) and a variable annuity (which is risky). An indexed annuity guarantees a minimum payout but some of your disbursements are based on the index your annuity is tied to. However, these annuities are complicated products, often with some kind of cap on your possible gains. This could be a limit on the percentage of the gain or a deducted spread. Usually, your principal is not 100 percent protected either, unless you hold it through the surrender period.


  • Guaranteed lifetime income. An annuity guarantees income for the rest of your life. No other financial instrument does this. Annuities have a guaranteed minimum rate of return.
  • If you are a spender. The advantage to an annuity is it allows you to put away money so you won’t spend it until you need it — when you retire. An annuity is a great option if you yourself receive an inheritance or a lump sum payment for another reason and want to save it for retirement. It’s also a great addition to your retirement income plan as another great source of supplemental income to your other retirement instruments, such as an IRA or a 401k.
  • Disbursement options. You can choose to receive payments from an annuity for a specific period of time or have them go to your beneficiaries after death.
  • Transfer of risk. The insurance company is taking on the risk of market investment for you, since you are guaranteed some return. As we all know, you can lose your principal with market investments, which only the insurance company would with an annuity purchase.
  • Riders are available. For an additional fee, you can attach a rider to your annuity, which can be living riders or death benefit riders. There are income riders that guarantee a growth rate until you start the payout period.
  • Annuities are like insurance policies. Your premiums are paid to your beneficiaries if you die early, but those deposits add to the pool and help to pay for those who outlive their projected life expectancy. You are guaranteed protection and income with an annuity.


  • In this blog post, Wealth CAP has simplified annuities. They can be much more complex and thus definitely require a licensed financial planner to explain one (you have to purchase an annuity from a licensed investment consultant who is licensed to sell annuities). Some have high fees and high surrender charges. However, they do have the potential for big returns on your investment.
  • While an annuity has some tax advantages, it doesn’t have as many as a 401k plan or an IRA. For example, your balance grows tax-free, but disbursements are subject to income tax. Furthermore, contributions to annuities don’t reduce your taxable income like some IRA contributions. Because of the lessen tax benefits, some investment consultants only recommend purchasing annuities when you’ve maximized all your 401k possibilities and your IRA contributions first.
  • Early withdrawal penalties. Penalties on retirement investments are nothing new. Usually, annuities give you access to at least the interest earned, with some allowing you access to 10 percent of the original premium after one year.
  • All annuities have commission fees, which are usually built into the annuity.


  • Carefully select your insurance company. Your monies are only as secure as the company holding your annuity. Only purchase annuities from highly-rated companies. Most states will cover up to $250,000 if a company does fold, and then it owes you money.
  • Annuitize gradually. Since rates of return are locked in with your purchase, you could be losing out on money if the rates go up. Remember first you are not in an annuity for the market risk. Second, you could spread out your contributions or your lump sum to take advantage of interest rates if they rise. However, take into account your opportunity cost of lost money on that spread out contribution.
  • Annuities aren’t for everyone. If you are not worried about having enough money for retirement, then an annuity is probably not for you. An annuity is for supplemental income.


Annuities are meant to be used to supplement income in your retirement years. That being said, you can use the monies ahead of time, with varying penalties and fees. Annuities are not meant to accumulate market growth. They should be saved for mutual fund investments or other investments such as real estate.



Annuities were designed for people to invest in the stock market but still have tax-deferred, insurance, and lifetime income. Annuities are not recommended to buy except with a licensed professional who can explain the ins and outs of your particular annuity product and advise you on which to buy. Annuities are great investment products when used rightly.

Wealth CAP is an online investment company that uses annuities as part of their dynamic bucketing portfolios (DBPs) and, specifically, as a safe investment. We also use market investments and alternative investments to design tailored retirement income plans to meet your needs. We’re passionate about helping people retire and invest for their future with as much return on investment, safety, and liquidity in their investment portfolio as possible. We spend time with our clients, discovering their retirement goals and helping them to diversify their portfolio, so they can retire without worry of paying for travel, helping their kids when needed, or paying for medical expenses or long-term care. We are a team of investment professionals with years of experience who want to help you enjoy your golden years to the fullest. We offer free consultations to help you discover your financial goals and to get retirement investment plan in place. Contact us today!