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Northwestern Mutual breaks down ‘annuities’ and how they work

Ashley Temer is a Financial Representative with Northwestern Mutual who helps professionals, families, and business owners plan for financial security. She’s here for your “Money Minute.”

You may have hear the term “annuity” before, but do you know how they work? An annuity is a long-term contract between a client and an insurance company that can help you accumulate money for retirement on a tax-deferred basis. They can provide a steady stream of income during retirement, which is guaranteed to last your lifetime. With longer life expectancies, fewer pensions, and rising doubts about social security, it’s harder than ever to feel secure about having enough retirement income.

An accumulation annuity is funded by either a single or series of contributions made over a period of time. There are no limits on non-qualified contributions.

An income annuity is funded by a single contribution that’s converted into a steady stream of income. You can choose when your income stream begins. You cannot outlive the income payments and they are not affected by market volatility.

For both types of annuities, withdrawals may be subject to ordinary income tax, a 10% IRS early withdrawal penalty if taken before age 59.5, and contractual withdrawal charges.

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